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Higher Interest Rates Raise Worries About US Housing Market


Longer-term interest rates have risen sharply in the United States this past week and that has raised concerns about the health of the already depressed housing sector. VOA's Barry Wood has more.

Central bank officials said Monday that the weak housing market could shave about one percent off U.S. economic growth this year. That is a substantial hit to an economy that in the first quarter registered an annualized growth rate of an anemic 0.6 percent.

The Federal Reserve had steadily raised short-term interest rates from 2004 to 2006, making 17 quarter point adjustments that brought the overnight lending rate from one percent to the current 5.25 percent.

But while short-term rates rose, longer-term rates held steady. That may now be changing as the interest rate on a 10-year government bond has risen in recent days by nearly one half percent to over five percent. Bond market expert Bill Gross, of Pimco Investments says higher bond prices mean higher mortgage interest rates for home buyers.

"The 30-year mortgage rate is drifting towards seven percent," said Bill Gross. "Seven percent is a big number for people who are either refinancing or buying a home. And it is certainly nothing like what we have experienced two or three years ago, which led to the housing boom. So now we're having a housing bust."

Gross spoke on Bloomberg Television.

Housing sales are down and new home construction has slowed dramatically. The home prices that on average rose by over 50 percent in the past five years have begun to decline.

Raymond Remy, a bond trader at Daiwa Securities in New York, says if investors become fearful that the housing downturn could trigger an overall economic decline, the Federal Reserve will have to cut interest rates.

"The housing market is like the flavor of the day," said Raymond Remy. "Two weeks ago, three weeks ago, everybody wanted to talk about housing. And now it is on the back burner. But certainly housing is such a big part of the economy that if it really melts down we're going to have a problem and the Fed will have to ease [cut rates]."

It is not only the prospect of higher mortgage interest rates that worries the investment community. If bond yields continue to rise, fixed income investments (bonds) may become an attractive option to stocks that are beginning to look overvalued.

In many markets stock prices have risen by 10 percent in just the first five months of this year.

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