During the past few years the real estate market expanded at record levels. Growth in large measure was powered by interest rates at 6 percent and below. Freddie Mac announced last week that interest levels had hit 6.32 percent. This is a substantial increase and suggests emerging investor worries about inflation -- just four weeks ago 30-year loans could be had for 6.01 percent plus fewer points.

Last summer the Federal Reserve stopped fighting inflation and began cutting interest rates. Lower Fed rates are good news for businesses and also for borrowers with ARMs and home equity loans tied to the prime rate.

Unfortunately, while the Fed was dropping interest levels, costs for oil and food began to soar, the housing market lost steam and the value of the dollar plummeted.

As higher costs filter through the economy and dollars buy less the result is a general lifting of prices -- and while a little lifting is okay a lot of lifting creates more inflation than anyone wants.

To date much of the turmoil in the mortgage marketplace has been a by-product of toxic mortgages -- loans and underwriting practices that regulators should never have allowed have now come back to bite large numbers of lenders and borrowers.

With inflation, adjustable mortgages that were affordable at 5 percent and 6 percent will be less affordable at 7 percent and 8 percent. For some borrowers with ARMs and home equity lines of credit the new rates won't be affordable at all and the result will be more distressed sales, more available real estate inventory and still more foreclosures.

None of this is a surprise. As we said last October:

"If inflation is really the core problem we face it will show up in the form of higher interest levels and steeper foreclosure rates by late Spring and early Summer next year. Payment re-sets from toxic loans will surely be a major cause of foreclosures, but the simple mechanism of higher rates will impact the majority of ARM borrowers, not just those troubled by 'nontraditional' loans. Suddenly now-comfy and secure ARM borrowers will understand what the 'marketplace risk' of adjustable rates really means."

For more articles by Peter G. Miller, please press here.

Published: June 18, 2008

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .