There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

• Insurance giant AIG became the latest addition to the string of financial failures, the taxpayer cost of which is rapidly rising
• Leading economic indicators declined by more than expected in August
• Along with a slowing economy, inflation also backed off rapidly in August
• Lower inflation gave interest rates room to fall, so mortgage rates took another impressive step downward over the past week

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

The Balance Tips Towards a Slowdown

For the past year, the economy has been teetering between two alternatives — neither one of them very appealing. On the one hand has been the prospect of a recession, with the housing slump setting off shock waves that have brought a series of Wall Street icons to their knees.

At the same time, efforts to stimulate the economy had to beware of the threat of inflation. Spurred primarily — but not exclusively — by rising oil prices, inflation earlier this year surged to levels not seen in over a decade.

The good news is that the rise in oil prices finally broke in late July, as suddenly and with as much relief as the breaking of a severe fever. While this was in part due to speculation inevitably running its course, it also was prompted by demand concerns due to a slowing global economy. Those economic concerns have come into sharp focus in recent weeks.

Economic Indicators and Inflation Turn Negative

The Conference Board’s Index of Leading Economic Indicators declined by 0.5% in August, following a 0.7% decline in July. While this is not the official measure of economic activity, the longer this decline is sustained, the more likely it is that the economy will find itself in a recession.

With oil prices declining and economic growth appearing to turn negative, consumer prices declined in August for the first time in nearly two years. The decline of 0.1% was modest, to be sure, but it is a welcome break from the rapid climb in prices over the prior three months.

Mortgage Rates Become Decidedly Cheaper

The easing of inflation, along with renewed (at least temporarily) confidence in the viability of Fannie Mae and Freddie Mac, have allowed mortgage rates to decline significantly. Freddie Mac’s benchmark 30-year mortgage rate was at 5.78% as of September 18, down from 5.93% the week before, and way down from the recent peak of 6.63% reached in late July.

Mortgage shoppers should not look this gift horse in the mouth. With mortgage rates and housing prices both down, any prospective home buyer who feels secure about job and income would be wise not to delay. Economic events are spinning quickly. A rapid economic recovery is probably not in the cards, but a sudden shock such as a collapse of the U.S. dollar (not an off-the-wall possibility given the way multi-billion dollar relief packages are being handed out like Halloween candy) could spike mortgage rates back up again. 

Tags: economy, fannie mae, freddie mac, housing prices, interest rates, mortgage, mortgage rates, recession

This entry was posted on Thursday, September 18th, 2008 at 11:42 am and is filed under Weekly Wrap-Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.