Implications for Consumers
Chairman Bernanke, in his testimony, faced a question on payment shock. In essence the concern is that when interest rates rise many people are likely to face rising interest rates on their mortgage for example and that would be painful.
Indeed, a rapid and large increase in rates would suggest significant payment shock. However, our expectation is that any interest rate increase would be small and delayed at least until the fourth quarter. Any Fed decision to raise rates would be taken within the context of the pace of economic growth and the view of what the impact of any rate rise would be on the market. With low rates and a very cautious Fed the extent of any payment shock for the national economy is likely to be very small. Certain areas, however, will see rates rise while local housing conditions remain weak. Interest rates are set nationally. Housing market prices are local. Monetary policy has historically not impacted all sectors/regions of the economy evenly.
Housing Prices
One big positive in this area has been the upturn in housing prices in many metro areas as indicated by the Case-Shiller indices out this week. The majority of metro areas are seeing home price appreciation and this will ease the pain of higher mortgage rates for distressed homeowners. Rising home prices mean rising equity positions and therefore reduce the incentive for strategic defaults.