What if LIBOR rose 1.5%?

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probably would not mean much in Jacksonville, where home prices are much lower than they are say in California, but this week's Barron's brings to light something that could cause a problem in the states of the US that have seen prices rise, due to our cheap cost of capital:

ALL OF THIS STUFF ABOUT big European banks and their derivatives exposure would seem rather foreign back in the U.S.A. But some U.S. homeowners stand to pay for the market roilings caused by Deutsche and other big, financially stressed European banks.

"Dollar funding stress is back," according to Citigroup's money-market research team. The negative headlines last week sharply pushed up European banks' funding costs, resulting in the highest spike in dollar borrowings from the European Central Bank since the European crisis of 2012-13, they write.

To be sure, U.S. money-fund reforms set to take effect in mid-October have helped to push up short-term rates, notably the benchmark London interbank offered rate. Libor is the base rate for many U.S. loans, including some home mortgages. Three-month Libor has risen by more than 50 basis points (one-half of a percentage point) over the past year, to 0.8456%, while the Fed has boosted its federal-funds target range just 25 basis points, to 0.25-0.5%.

That's real dollars and cents for U.S. homeowners. In a commentary, David Kotok of Cumberland Advisors quotes Madeline Schnapp, whom he describes as a "superb economist and researcher of the housing market in the West":

Taking a $700,000 adjustable-rate mortgage tied to Libor, a 25-basis-point rise in the loan rate to 3.5% from 3.25% would increase the monthly payment about $100, to $3,150, which would be "tolerable." But if Libor jumps to 1.5%, the resulting rise in the adjustable rate mortgage to 4.25% would boost the monthly payment to around $3,500. "Yikes!" she writes. As for loans that were as much as 97% of the original purchase price, what happens to high-priced San Francisco Bay Area properties bought on that kind of shoestring?

She notes that sales there have been trending lower, on a year-over-year basis. And prices have rolled over in two Bay Area counties, with a third county flat, "suggesting that we may be at or near a top," she adds. One month doesn't make a trend, but back East, there also are well-advertised toppy signs at the high end.

If the rise in Libor impinges on the housing market, the Federal Reserve would have another reason to go slow on further rate hikes. A rate increase in December has a 59% probability, based on Bloomberg's data on fed-funds futures. But odds are against a further boost in 2017. Indeed, the probability of the Fed's target range remaining at the current 0.25%-0.5% are roughly equal to the chance of it hitting 0.75%-1%.

After the last rate hike, last December, it took the stock market until March to recover. With Billary predicted to win over Cra-Cra, there is some stability in the markets, but if he were to win, "Lord Help Us", as the markets would run for the hills over his Isolationist policies.