Interest Rates and the fate of the housing market 2006

There's little question that interest rates will continue to climb into the next year.
What's less clear, however, is what that means for the housing market and the market's impact on the overall economy. Most headlines seem to be looking for doom.

Bear Stearns chief economist David Malpass takes the most sanguine view of the situation that I've seen. Malpass' position essentially is that the American consumer is well positioned to benefit from interest rate hikes. Thus housing markets will cool in places (the monthly payments get more expensive, so demand will fall) but overall we aren't looking at a crash (because a strong economy and well-positioned American consumer imply people won't be panicking).

Time deposits and savings accounts alone total a staggering $4.3
trillion, versus slow-growing credit-card debt of $800 billion. True,
the U.S. is the world's biggest debtor, but it is building assets
faster than debt. Even if household assets took a hard fall, the
remaining net worth would still dwarf other countries'. On a per capita
basis, counting mortgages but not houses, net financial assets total
$89,800 in the U.S. versus $76,900 in No. 2 saver, Japan.

Savings will pay more interest, some of which will be eaten up servicing revolving debt, but it's a net positive to the consumer's wallet. Over 80% of mortgages are fixed rate, so here the rising rates have no direct impact.

So this week's news give the bubblistas more fodder. But does it play all the way through to a pop? Don't count us out yet.