Higher rates here to stay

by MPA26 Sep 2013

The economy will continue to grow over the next year in spite of higher interest rates thanks to record housing affordability and other factors, according to a new report by TD Economics.

"The U.S. economy has repaired much of the damage caused by the Great Recession. The housing market has worked off the excess supply that led prices to plunge, consumers and businesses have paid off debt, and government deficits are improving," said TD Chief Economist Craig Alexander. "All of this sets the stage for an improvement in economic growth over the next several years."

In spite of the economy’s progress, mortgage interest rates have risen by more than a full percentage point since May on fears that the Federal Reserve would wind down its $85bn-per-month bond-buying program, also known as quantitative easing. Although the Fed shocked investors earlier this month by keeping the program in place for the time being, Alexander said the Fed’s bond buys would eventually be wound back.

"Quantitative easing was never meant to go on forever,” he said.“The Fed's concern over near-term downside risks has pushed tapering out a few meetings, but the realization that the program will end in the relatively near future means higher interest rates are here to stay.

“Higher mortgage rates reduce housing affordability and make it more difficult for new homebuyers to enter the market," Alexander added. “They have already resulted in a steep drop in mortgage refinancing and a decline in new home sales.”

However, housing affordability is currently at record highs. According to TD Economics, interest rates would have to hit 7% before affordability was “eroded to its historical average.”


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