Wednesday, January 19, 2005

I'll bet the house 

Tyler Cowen and Nouriel Roubini give two plausible arguments for why we could be headed to rougher times and higher interest rates. While flying back to St. Cloud last Sunday I ran into a group of local financial service professionals, and one asked about mortgage rates. Unlike Cowen and Roubini or Asha Bangalore at Northern Trust, I don't think long rates are going higher.
  1. How much greater does the gap between 10-year Treasuries and 10-year Eurosecurities need to be before we see a reversal in the exchange rate? I think that is already coming. When it comes, one reason for the Fed to lift short term rates disappears.
  2. Consumer credit, claimed to be the bugaboo that is causing all kinds of problems a couple of years ago, has in fact moderated.
  3. Last, if Roubini is correct in his analysis of the Fed, you would expect the Fed to in fact ease interest rates ahead to allow the housing bubble to dissipate more slowly. Like him, I can't tell you if there's a housing bubble or not (and no, I don't think a 35% rise in inflation-adjusted housing prices is evidence enough -- demographic shifts and quality adjustments may account for much of the rise) but so far the gloomier predictions have not held up.
So far, 10-years have held constant and so have mortgages. I am fairly confident that these rates will continue.