More mortgage pain coming
June 30, 2006 (The Mercury News)

Get ready for mortgage rates of 7 percent -- or higher.

The Federal Reserve on Thursday announced a quarter-percentage-point increase in its federal funds rate, the 17th boost in its benchmark short-term interest rate since mid-2004.

But while the stock market jumped in response, ripple effects from the decision mean most consumers will soon be paying even more on their credit cards and home equity loans, whose interest rates have more than doubled since 2003.

The Fed doesn't directly affect the mortgage market, but mortgage rates have been moving higher in anticipation of the Fed action and experts say more increases are likely.

Mortgage financing company Freddie Mac said in its weekly report Thursday that the national average rate for a 30-year fixed-rate mortgage rose to 6.78 percent, the highest level since May 2002. Bankrate.com said that as of Wednesday the rate for a jumbo 30-year fixed-rate mortgage was 7.11 percent, while a one-year adjustable-rate mortgage was 6.09 percent.

The monthly cost for someone taking out a $500,000 fixed-rate mortgage at 7.11 percent is $3,364, or $487 more than what a borrower with a similar loan would have paid in June 2003, when fixed rates hit their lowest point in decades.

AntiSpin: Every asset class on earth celebrated the Fed's decision to let inflation rip with the implicit promise to back off rate hikes. The DOW jumped 217 points (up almost 2%) while gold blew through $600, up more than $20 from $582 the day before (up over 3%). The one asset class the continues to suffer is real estate. This is consistent with our theory that in the ongoing stagflationary environment, the stock market will continue to rise in nominal (inflation-adjusted) terms but decline in real terms as it has since 2001, assets such as real estate purchased using ever more expensive credit may decline only modestly nominally but decline significantly in real terms, and hard assets that function both as a means of exchange and as a store of value (i.e., money: oil, gold, silver, platinum, etc.) will increase in value in real terms.