Long term rates headed higher

Recent action in the bond market strongly suggests that interest rates for most mortgages will be going up. This will put further pressure on demand as less and less families are able to obtain mortgages. Price will eventually have to come down for any seller who must sell. The demand is simply not there.

Homeowners who are able to continue to make their mortgage payments and ride out this market are likely to do fine in the long term. Those who lose their homes or are forced to sell will not do as well. This has happened before. Those who bought in 1989 or 1990, before the last downturn, and where able to ride it out did quite well.

When may it end?

If history is any indication, not for a while. The basic drivers of demand are income and for most that means employment. Until employment and income heats up significantly demand is not likely to be sufficient to create an upturn. An artificial driver of demand is exotic mortgages. It would seem that the days of those loans are over until at least the well into the next up cycle.

Higher bond prices are not good for the rest of the economy either. It cost companies more to finance their operations and thus they will slow expansion. Whether this will lead to higher unemployment is anyone's guess at this point. It may mean just a slower economy for a while.

As the cost of capital increase, demand for it will decrease and this in turn means that less will be spent on what capital buys. The typical uses of capital include labor and equipment. Thus, capital spending excluding government spending, may be a good indicator to watch for clues as to a trend change in the housing marketing.