Towards the end of economic expansions, interest rates usually start to rise as strong loan demand bumps up against central bank tightening.
At first the effect on the broader economy is minimal, so consumers, companies and governments don’t let a slight uptick in financing costs interfere with their borrowing and spending. But eventually rising rates begin to bite and borrowers get skittish, throwing the leverage machine into reverse and producing an equities bear market and Main Street recession.
We are there. After a year of gradual increases, interest rates are finally high enough to start popping bubbles. Consider housing and autos:
Mortgage Rates Up, Affordability Down, Housing Party Over
The past few years’ housing boom has been relatively quiet, but a boom nonetheless. Mortgage rates in the 3% – 4% range made houses widely affordable, so demand exceeded supply and prices rose, eventually surpassing 2006 bubble levels in hot markets like Denver and Seattle.
But this week mortgages hit 5% ..