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Interest Rates and Mortgages

MELISSA BLOCK, host:

Why is that? Why are mortgage rates not going up in step with the steady increase in short-term rates from the Fed? For some answers to that question, we turn to Mark Vitner. He's a senior economist at Wachovia Corporation.

Thanks for being with us.

Mr. MARK VITNER (Senior Economist, Wachovia Corporation): Oh, it's my pleasure.

BLOCK: We've seen this consistent upward march in short-term interest rates over the past year or so, but a very different pattern with mortgage rates. How would you describe the pattern there?

Mr. VITNER: Well, mortgage rates are actually lower today than they were when the Fed began raising interest rates about a year ago, and it's a bit of a mystery as to why. I mean, we have some ideas as to why long-term interest rates have fallen, but Alan Greenspan himself has come out and said it's a bit of a conundrum. It's very unusual for long-term interest rates to have done what they have done.

BLOCK: Well, what are some possibilities? What are mortgage rates responding to?

Mr. VITNER: Well, mortgage rates are very closely tied to long-term Treasury rates, or the rates on the Treasury's 10-year bond. And this afternoon, right after the Fed raised interest rates, they were essentially unchanged at 4.2 percent. And the rate on 30-year mortgages tends to be about 1 1/2 percentage points above that, which would put rates, you know, slightly under 6 percent on a 30-year fixed-rate mortgage, which is just incredibly low.

BLOCK: If you look at patterns in the past, when short-term rates have been high, have mortgage rates also been high?

Mr. VITNER: Yes, particularly when the Fed began to increase interest rates, because in the past, when the Federal Reserve began to tighten monetary policy, it was usually because inflation was showing signs of accelerating, and accelerating to some unknown level. This time, the Fed has been very clear that even though we are seeing some signs of inflation out there, that they believe that inflation will be well contained. And because Alan Greenspan has been at the Fed for so long, and the Fed has done such a good job of bringing inflation down from those double-digit levels that we saw in the late '70s and the early '80s to the very low levels that we've seen in recent years, they have a lot of credibility in the bond market.

BLOCK: Does that mean that the bond market is seeing something different, seeing some different factor maybe than what the Fed sees?

Mr. VITNER: Well, obviously, bond investors either see much weaker economic growth out there, much lower inflation or it may be that they're just saying, `Gosh, you know, there's so much risk in this world today that I feel much better about holding Treasuries today.' And I think the risk of holding Treasuries is so much lower than being exposed on the stock market or being exposed overseas or maybe even in real estate right now since there's so much talk of a bubble. And that may be part of the reason that long-term interest rates are coming down. We also have a lot of buying from overseas investors. Europeans and Asian investors have been buying a large number of Treasury securities, and that's helping keep interest rates down.

BLOCK: With the housing market as hot as it is, what do see ahead? Do you figure that mortgage rates will be staying fairly low? And does this market cool off, do you think?

Mr. VITNER: We believe rates will rise a little bit this year. I think that we'll probably end the year about a half a percentage point higher than we are today. And rates can move up very quickly. Long-term rates should end around 4.7 percent, which puts 30-year mortgages just a little over 6 percent. They're still going to be extremely low. Any mortgage rate below 7 percent will keep housing activity at a very fevered pitch. Any mortgage rate below 8 percent is likely to keep housing at a relatively strong pace. And we don't see mortgage rates rising above 8 percent for the next couple of years, at the earliest.

BLOCK: Mark Vitner, thanks very much.

Mr. VITNER: It's been my pleasure.

BLOCK: Mark Vitner is a senior economist at Wachovia Corporation in Charlotte, North Carolina.

You can see a comparison of short-term interest rates and mortgage rates, and read today's statement from the Federal Reserve, at npr.org. Transcript provided by NPR, Copyright NPR.

As special correspondent and guest host of NPR's news programs, Melissa Block brings her signature combination of warmth and incisive reporting. Her work over the decades has earned her journalism's highest honors, and has made her one of NPR's most familiar and beloved voices.