Negative Feedback Gauges and Gates

I read someone today who said that we are all wrong about rising rates being bad for housing.  Everyone else is worried that if the Fed tapers, mortgage rates will rise and choke off the housing rebound.  As of today, rates are rising but have not yet reduced demand for mortgages.

This fellow’s argument was that rising mortgage rates are good for housing because they indicate strong demand.  He is half right.  When rates are set by supply and demand, rather than Fed intervention, then high rates will both indicate and constrain demand.

f29p115Shown here is a flyball governor, the earliest known negative feedback system.  When there is too much steam pressure, the balls spin outward, lifting a rod that closes the throttle.   The mortgage market, and the economy in general, will heat up until rates rise and throttle it back.

Personally, I believe that this system can regulate itself, but with some volatility.  The throttle is sticky, and so we  have the Fed to nudge it.  This is what keeps us guessing.  Are mortgage rates responding to housing demand, or Fed action?

Another factor that both gauges and gates the economy is the price of oil, except that you have to account for currency effects.  You have to use the price of oil with the GDP deflator, or divide by a dollar index.

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