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Mortgage Freak Out: Fed Will Not Let Mortgage Rates Go to Six Percent

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Will higher mortgage rates hurt housing? It could, but not where they are now. Not at four percent for a 30-year fixed rate mortgage.

Everyone is FREAKED OUT about the possibility that mortgage rates--which are roughly tied to 10-year Treasury yields--could go through the roof. How much? They're four percent now, but everyone is concerned they could go to six percent. That would not be good, because it would add about 25 percent to the monthly cost of a home. Here's an example:

  • $300,000 home at 4% rate = $1.432 monthly payment
  • $300,000 home at 6% rate = $1,798 monthly payment

Regardless, it's highly unlikely this is going to happen any time soon. There's a simple reason: Federal Reserve Chairman Ben Bernanke (and his likely successor, Janet Yellen) and the rest of the Fed won't let it happen!

The Fed is dovish, and members have made it clear that if interest rates get too far ahead of the economy - if higher rates are a threat to economic growth - they will continue with QE3.

As for housing: there is little doubt that housing affordability is near a historic high. On the demand side, here's what I see:

  1. Jobs: slow, but moderate growth
  2. Household formations: increasing
  3. Mortgage rates: low, but rising


This is an outstanding situation. Now look at the supply side:

  1. Supply of homes: constricted
  2. Sales: rising
  3. Prices: rising
  4. Land costs: rising


Good, but keep your eye on the rising price.

What will the demand side look like in second half of the year? It will be a function of job and wage growth, as well as mortgage rates, and credit availability. Eventually, higher prices - and higher mortgage rates - will impact affordability, but we are a long way from that.

One point to remember: in the last housing rise--from the early 2000's to 2007--much of the dramatic rise in home prices was fueled by very loose underwriting standards, which allowed many to buy houses they could not otherwise afford. This cycle, those loose underwriting standards are decidedly absent. That will put a lid on home price appreciation...but should also help make this up cycle much more sustainable.

Bernanke may not completely understand the action of the markets (who does?)...and we may have reached the bottom for interest rates...but that's not the question. The question is, where do we go back to?

If the 10-year goes up 200 basis points, to 4.5 percent, any time soon, that's not good, but the Fed will act.

By CNBC's Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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