{"id":33880,"date":"2012-11-29T19:37:30","date_gmt":"2012-11-30T00:37:30","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/11\/with-the-economy-recovering-are-higher-rates-imminent\/"},"modified":"2012-11-29T19:37:30","modified_gmt":"2012-11-30T00:37:30","slug":"with-the-economy-recovering-are-higher-rates-imminent","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/11\/29\/with-the-economy-recovering-are-higher-rates-imminent\/","title":{"rendered":"With the Economy Recovering, Are Higher Rates Imminent?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

Quietly, under the radar, all signs are pointing to a strong recovery in the housing market.\u00a0 Sales of both previously occupied homes and new homes rose sharply last month, as did building permits.\u00a0\u00a0 Building permits are up a whopping 22% over the past year.<\/p>\n

Mortgage applications are rising. And prices are rising in most markets. We\u2019ve even seen improvement in billings from architects<\/a>.<\/p>\n

You wouldn\u2019t know it from watching the news or from talking to the average American\u2014who remains deeply pessimistic about housing and the economy in general\u2014but we have the makings of a mini-boom in housing that should go a long ways towards stabilizing the U.S. economy.<\/p>\n

Remember, in addition to the jobs in construction and finance that a strong housing market creates, there are the spillover effects.\u00a0 A strong housing market makes it easier for Americans to sell their homes and move for a better job opportunity.\u00a0 It\u2019s impossible to calculate with any accuracy, but some portion of our 7.9% unemployment rate is \u201cfrictional\u201d unemployment, which means that would-be workers are not able to take available jobs because they are not mobile enough to take them.<\/p>\n

What does all of this mean for interest rates\u2014and for a resumption in the bull market in equities?<\/p>\n

So much of the recent recover y in home prices has been due to low mortgage rates.\u00a0 Housing is affected by rates the same way that bonds are.\u00a0 Lower interest rates mean higher home prices for a given monthly payment.\u00a0 So, if mortgage rates rise too quickly, they can nip this would-be recovery in the bud.<\/p>\n

This is something that bears watching, but for now it doesn\u2019t concern me.\u00a0 I do<\/em> expect rates to rise from their current lows, but I do not<\/em> expect them to return to pre-crisis levels any time soon.\u00a0 As Japan has proven, inflation and interest rates can remain subdued for years following a major asset bubble.<\/p>\n

It is a simple case of supply and demand.\u00a0 When there is a large supply of money but comparatively little demand for it in the form of loans, the price of money\u2014in this case the interest rate\u2014falls.\u00a0 This was the case for Japan during its two lost decades, and it is the case in America and Europe today.\u00a0 A deleveraging private sector is more than compensating for a spendthrift government to reduce the total amount of debt.\u00a0 Add to this Bernanke\u2019s insistence on keeping quantitative easing measure in effect until we see a real fall in the unemployment rate, and you have a recipe for continued low rates, housing recovery or not.<\/p>\n

Where does this leave the stock market?<\/p>\n

Worries about higher taxes have hit dividend-paying stocks in the weeks following the election, and I expect tax loss selling by high-net-worth investors to keep a lid on prices for the remainder of 2012.<\/p>\n

But in a world of low yields, dividend paying stocks are still going to be the best option for most investors.\u00a0 My favorite dividend-focused ETF is the Vanguard Dividend Appreciation ETF ($<\/span>VIG<\/a>)<\/strong>, which yields a modest 2.11% in dividends.\u00a0 But unlike bond coupon payments, VIG\u2019s payout will rise over time.\u00a0 The ETF\u2019s holdings consist of stocks that have raised their dividend for a minimum of 10 consecutive years\u2014which means they raised them throughout the chaotic years of 2008 to the present.\u00a0\u00a0 The ETF\u2019s cash payout is up 13% year over year, and I expect continued strong boosts in the years ahead.<\/p>\n

Disclosures: Sizemore Capital is long VIG. This article first appeared on MarketWatch<\/a>.<\/p>\n

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