Wednesday, April 19, 2006

Inflation is Under Control, No its Not

The past two days have been pretty volatile for the bond market. Yesterday the fed suggested that it would stop increasing interest rates soon. Today though, the inflation data came in higher than expected, which spooked bond traders into thinking the fed won’t be in a position to not raise rates through the end of the summer. Personally, I think the fed will raise rates two more times and pause at 5.25%. That would probably bring the 10 year treasury rate to at least 5.50% and mortgage rates to about 7.00% by about July.

If you had a monthly mortgage payment budget of $3000, then you could afford a $500,000 mortgage at a rate of 6%. However, if you had the same $3000 budget then you could only afford a $450,000 mortgage if the rate were increased to 7%. Basically, a 100 basis point increase in mortgage rates lowers the value of a $500,000 property by $50,000 or 10%.

3 Comments:

Anonymous Anonymous said...

No, what it means is that at 7%, the buyer can only afford a lesser house.

Saturday, April 22, 2006 3:57:00 PM  
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Tuesday, April 25, 2006 1:39:00 AM  
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Thursday, April 27, 2006 12:02:00 AM  

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