OECD warning: rates must rise

[UpInArms]

http://www.theaustralian.news.com.au/common/story_page/0,5744,7987577%255E601,00.html

Borrowers should prepare for interest rates to rise by a further one percentage point and builders to face a market crash, according to the Organisation for Economic Co-operation and Development.

The OECD has expressed real concern that nations such as Australia, the US and Britain remain highly indebted and may suffer "large wealth losses, especially in the housing sector, should interest rates increase abruptly".

Despite the grim predictions, the OECD's half-yearly report released in Paris last night, is upbeat about the prospects for Australia, with growth predicted at 3.7 per cent next year and 4 per cent in 2005 as the worst effects of the world downturn and the drought pass.

...more...

note: although much of this article refers to the Australian economy, the second paragraph quoted above does not - and I believe may serve as a warning shot across the bow

[54anickel]

1. The housing bust of the 80's just came up in another thread yesterday.

I think we are in for a very bumpy ride. Mr Greenspans bag of tricks is just about plum empty.

[wysimdnwyg]

2. If you're in real estate...

now's the time to get out. Rates WILL rise (they must, given the current budget situation), and housing sales will plummet. My mom paid dearly in the '80s for not getting out in time.

[FlaGranny]

3. I don't quite understand what you mean

by get out of real estate. Do you mean everyone should sell their homes? People would have to rent for higher monthly costs than their mortgages. How would renting be an improvement over paying a mortgage? Even if the bottom drops out completely from real estate, if you can keep paying your mortgage, eventually you will have it paid off and own the real estate. But even if you can't continue the payments and lose the property, you would be no worse off in the long run.

[Frances]

4. I think the reference is to real estate agents

It was very hard for agents to make sales in the early 80s. The interest rates were so high that people did not want to buy houses.

I recently bought a house in the area where I want to retire because I wanted to get the low interest rates available. I will rent out the place until I can move there. Unfortunately for me as a landlady the rents have fallen in that area. Fortunately for me as a renter in my present location, the rent has also gone down here.

The fear for the overall economy is that if the housing market goes down, builders and construction workers will lose their jobs. That means that people who supply the materials for houses will lose their jobs etc.

[54anickel]

5. Yes, the housing market has been our "bright spot".

Hoping all that refinanced or took out equity loans got a locked in rate. One popular type of loan (that we have) was a 7 year, amortorized over 15 or 30. Low payments for 7 years with a ballon at the end which means refinancing at whatever the going rate may be. We are paying the extra on principal so that the loan is paid off in the 7 years regardless. That's a $550 difference! If we hit on hard times we can go back to paying the lower payment, but that's a gamble on having to refinance what is left at a much higher interest rate.

http://www.financialsense.com/Market/archive/2003/1118.html

Mortgage refinancing is what stands behind the American consumers’ ability to spend and consume. Housing’s strength still remains the major bright spot of the economic recovery. It has been the chief beneficiary of the Fed’s inflation policies. This is the key sector to watch in determining the strength and durability of the economic recovery. The Fed is hoping that business spending will pick up by the time the housing market and the consumer spending roll over.

The housing market is driven by low interest rates. What happens to this sector if interest rates suddenly jump as they did back in June of this year? If interest rates rise and choke off the housing market before the labor markets improve, then the economy runs into trouble. The housing market has become far too important to the health of the U.S. recovery. This is because of the role that housing plays as an important source of credit to the economy. Real estate loans now account for over 50% of all bank loans and represent over 70% of household debt. The mortgage backed security markets are now bigger than the Treasury market. If anything goes wrong in housing, it could send tremors throughout the whole financial system, i.e. the banking system.