The Federal Reserve had an interesting observation of the state of the housing market this week. Sales have slowed mostly because of both the rising interest rates and also because housing sales prices have risen faster than the salaries of prospective buyers. The Fed seems to think it is simply a soft touch down of the housing market to cool inflation, and that it will pick up when housing prices and salaries reach parity.

With respect to refis, the rising interest rates have cooled the market, but the adjustable rate mortgages and other creatively financed mortgages of the past three or four years are arriving at their first change dates, resulting in a huge increase to the monthly mortgage payments paid by borrowers. Consequently, many of them are faced with the choice of refinancing again or foreclosure. I just did a closing two weeks ago in which the borrower was refinancing with yet another adjustable rate mortgage which had an initial rate of 4% for two years, and then jumped to 11% percent. The Fed seems to think that this scenario will fuel a new boom in refi's. We are already beginning to see it in Connecticut.

Comparitively speaking the current interest rate, although higher than a year ago, are really not that bad. I remember 4 years ago the economists said anything below 8% was good. I think that if the Fed would just stop raising interest rates the market would adjust accordingly even at the current levels.