Unintended Consequences

Bailout = More Debt = Higher Mortgage Rates

So much for the calm.

Yesterday's stock market plunge was the biggest, in percentage terms, since 1987. As financial institutions, investors, and government officials alike take stock of events -- and what's likely to happen next -- one quick consequence has been a spike in mortgage interest rates. From around 6% less than a week ago, 30 year rates are now between 6.5% and 6.75%.

What happened?

The money for the federal bailout/bank equity purchases/debt guaranties is going to be borrowed. Trillions (potentially) in new government debt "crowds out" (as economists would say) private borrowing. In layman's terms, all that new supply drives down prices, which is equivalent to pushing up interest rates. (If you were the Chinese government, wouldn't you require higher rates to lend to the U.S. now?)

So the single biggest component in the cost of housing, mortgage rates, is now more expensive, at least temporarily.

So much for lessening the pain in the national housing market, which supposedly triggered all the economy's financial problems in the first place.

P.S.: congrats to Steve Devitt at U.S. Bank, who encouraged my clients to lock last week when rates were 5 7/8%! Nice call!