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August 29, 2005
Sharp rise in home equity rates?
Had lunch today with David Hale, the preeminent international economist who was in Atlanta to give a speech. Hale was just back from the Federal Reserve conference in Jackson Hole over the weekend, and said that from his conversations with Fed officials, that the central bank may be prepared to raise rates higher than is widely believed.
Based on his conversations with Fed officials, Hale believes that the Fed won't stop raising rates until the Fed Funds rate hits 4.5% -- and he thinks it's quite possible the central bank takes the Fed Funds rate up to 5%. Not that the Fed is trying to prick the housing bubble; Hale believes the Fed simply wants to cool real economic growth (meaning, after subtracing inflation) back down to the 3%, and they believe it could mean taking rates up to 5%. Of course, this scenario assumes that long-term rates don't move dramatically (the Fed has been mystified that long-term rates -- which are controlled not by the Fed, but by the private markets -- haven't moved in tandem with short term rates, resulting in a flattening yield curve). If long-rates did begin to move on their own, then that could negate this much Fed tightening.
But if Hale's hunch proves correct, that could spell bad news for anyone with a home-equity line or an adjustable rate mortgage. That could mean home equity rates, which are generally pegged to the prime rate, could climb to 8% or higher. And it was just 18 months ago that many of these home equity loans pegged to the prime rate were as low as 3.75% or 4%.
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