The prospect that mortgage rates could rise 100 basis points or more after two Federal programs that have been keeping rates artificially low expire this quarter is raising fears among economists and the general public that the economy will re-enter a recession this year.
Nobel Prize-winning economist Paul Krugman told Bloomberg News yesterday that he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.
“It is not a low probability event, 30 to 40 percent chance,” Krugman said in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”
The Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices, Krugman said.
“Probably mortgage rates go up some,” he said. “New home sales are still pretty weak and new home construction is a joke by the standards of a few years ago. But they probably falter.”
Any sales by the Fed of mortgage-backed securities as part of a so-called “exit strategy” from record stimulus could increase mortgage rates by 1 percentage point and impede the recovery, Krugman said.
The rate for 30-year fixed U.S. home loans rose to 5.14 percent in the week ended Dec. 31, the fourth straight weekly increase and highest level since August, according to mortgage finance company Freddie Mac.
The Princeton University professor joined Harvard’s Martin Feldstein and Columbia’s Joseph Stiglitz, another Nobel laureate, in sounding an alarm for the world’s largest economy during the annual meeting of the American Economic Association. Feldstein yesterday called the fading stimulus “a serious cloud,” and Stiglitz said growth won’t be “robust” soon.
A growing percentage of the national public agrees with Krugman. A national survey called the Wealth Hazards Worry Index found that the number of people who believe that the U.S. economy could enter another recession in 2010 now stands at 40 percent. Another 32 percent of survey respondents are unsure if a “double-dip” recession is on tap for 2010, while only 28 percent of people are confident that no recession will occur in 2010.
“The government stimulus and support programs in 2009 were instrumental in holding the economy together so that the recovery process could get underway, the fragility of the recovery is now center stage,” says Thomas Hertog, editor at Wealth Hazards.
Respondents to the Wealth Hazards Worry Index survey cited continuing concerns about the expiration of government stimulus and support programs and how this might impact their own financial health. Specifically, people are anxious about the high rate of unemployment, rising interest rates, price inflation, more foreclosures, and flat wages or even wage deflation as employers bargain hunt for new employees. In summary, 40 percent of people expect another recession-like downturn and nearly one-third of people are not sure if another recession is waiting just around the corner.