Since May 2013, home mortgage rates have risen over a percentage point. On June 19, 2013, Federal Reserve Chairman Ben Bernanke addressed the media with answers to how the Federal Reserve would pull back on its monetary stimulus program. When asked at the press conference to explain why the Federal Government’s recent economic and labor forecasts were relatively optimistic, Bernanke said the economic fundamentals were looking better.
“In particular,” Bernanke said, “the housing sector, which has been a drag on growth since the crisis, is now, obviously, a support to growth. It’s not only creating construction jobs, but as house prices rise, increased household wealth supports consumption spending [and] consumer sentiment.”
In a research note to Goldman Sachs clients, economist Kris Dawsey and Hui Shan suggested the negative effect higher mortgage rates would put on the gross domestic product (GDP) growth would be fairly small, about two-tenths of a percentage point over the next year.
“Importantly,” they wrote, “the recent increase in mortgage rates has been only one part of a broader tightening in financial conditions – including a stronger dollar and lower stock prices – that might be expected to subtract around 0.4 percentage point from real GDP growth over the next year.” Dawsey and Shan suggested the hit to the economy will be “meaningful but not insurmountable.”
In contrast, Bernanke highlighted CBO projections of about a 1.5 percentage point cut to GDP this year due to federal fiscal policy – including tax rate hikes on top earners, the expiration of a payroll tax holiday and the automatic budget cuts of the sequester.
The effect a 1 percentage-point rise in mortgage rates is likely to be modest. Bernanke suggested during the same press conference that the housing recovery could withstand higher interest rates, as consumer expectations of continued gains in home prices sustains demand.
Gross domestic product (GDP) is the market value of officially recognized goods and services produced by a country during a certain time period.
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