-- Posted Tuesday, 17 September 2013 | | Disqus

Want some more evidence that the Fed’s winding up of QE is backfiring badly on the US economy? Just look at the precipitous plunge in US mortgage applications to their lowest level since the depths of the global financial crisis. The US housing recovery is definitely dead on its feet.

Mortgage applications have dropped for 15 out of the last 18 weeks, and hit the lowest level since October 2008 in the week ended September 6th in a Mortgage Bankers Association index cited by Bloomberg today.

Rising mortgage rates

The average rate on a 30-year fixed-rate purchase loan was 4.57 per cent in the week ended September 12th, close to a two-year high, according to Freddie Mac. High mortgage rates dissuade would-be house purchasers because they face higher monthly payments. It’s toxic medicine for any housing market.

Over the past year the US housing market has been showing clear signs of recovery with house prices up by 10.2 per cent across the nation mainly due to falling inventories and a rush to fix mortgages for 30 years at once-a-lifetime lows.

The problem for the Federal Reserve is that the very weak US economic recovery of the past five years is mainly down to housing and share prices. Take away the housing recovery and there is only a highly inflated stock market left whose value reflects an economic recovery that probably just died.

Wall Street Crash?

A sudden adjustment of stock prices is eminently likely in these circumstances, just as the bond market crashed by 40 per cent over the summer. That slump followed this initial hints back in May that the Fed might be about to start to wind down QE, and the markets did the rest with treasury bond yields jumping from two to three per cent. Remember that is a 50 per cent increase in yield, not just one per cent!

Can the US economy really handle a regime of higher interest rates? The auguries from the housing market suggest not but the stock market thinks it knows better.

-- Posted Tuesday, 17 September 2013 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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