Bailout or No Bailout, Expect Manic Mortgage Rates
Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.
This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.
The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?
Bailout Questions Will Just Begin with Bill Passage
Even with the bailout bill seeming likelier to pass, credit markets remained tight, and the stock market tanked once again. This may be a hint of the reality that awaits after the bill’s passage:
- It remains to be seen if the bill will do what is intended. The two things everyone agrees on about the credit market problem is that it is huge, and it is complex. Whether $700 billion is enough to turn things around, and whether that money will make it through the maze of accounting procedures and changing regulations to get to the right places, remains to be seen.
- What $700 billion will certainly do, at least in the near-term, is balloon the federal deficit, putting severe downward pressure on the U.S. dollar. A weak dollar is inflationary, and thus puts upward pressure on interest rates.
Mortgage Rates: Two Scenarios with One Outcome
Curiously then, the outcome for mortgage rates might be the same whether or not the bill passes:
- If the bill fails, the lack of lender liquidity will remain an issue. Like anything else, when liquidity is scarce, it becomes more expensive. Specifically, when it comes to loans, the price of scarcity is reflected in interest rates. While short-term, high-quality interest rates may remain low — or get even lower as the Federal Reserve tries to jump-start the economy — loans of any length and loans to individuals could well demand a much higher rate.
- If the bill passes, the combination of stimulating the economy while weaking the dollar could prove highly inflationary. Lenders expect to make more than the inflation rate when they lend their money, so this would push interest rates higher.
This is not to say that it doesn’t matter whether or not the bill passes. It could have several effects on the banking system and the economic cycle, not to mention investor behavior. However, to focus narrowly on mortgage rates, it seems both scenarios could lead them higher. At the very least, the weeks ahead may see wild swings in mortgage rates, as economic news — and interpretation of that news — develops quickly.
Some Perspective on Current Mortgage Rates
All of the above should be considered in the context of current mortgage rates. At 6.10%, 30-year mortgage rates are still relatively low on a historical basis. This means that while it may be difficult given everything that’s going on in the mortgage market, shopping for a mortgage now may prove to be well worth the effort.
Tags: 2008, bailout, interest rates, lenders, mortgage rates
