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Mortgage Rates Zig and Zag: This Week It’s Down

As expected, mortgage rates continued their manic behavior, heading downward this week as focus shifted to the likelihood of recession: 

Certainly, this is the most troubling economic environment in a generation — but one with at least some glimmer of hope.

Interest Rates and Recession

The recent drop in interest rates in response to mounting news of a recession is typical of how interest rates tend to react to economic cycles. Rates fall when the market anticipates a recession for a few reasons. One is that demand for credit tends to fall. Another is that bonds — especially U.S. Treasuries — are viewed as a safe haven when riskier investments are in tumult. Finally, sagging economic demand tends to take the edge off of inflation.

The wild card this time around is that the U.S. government is trying to apply fiscal and monetary stimulus when they are not well positioned to do so: they are spending huge amounts of money with the budget deficit already high, and they are lowering Federal Reserve rates that are already approaching zero. This has created sporadic concerns about the dollar, and may continue to do so. When those concerns about the dollar manifest themselves, market interest rates may spike upward.

As long as the classic pattern holds though, as it did this week, lower market interest rates are one of the things that help economic cycles run their course. Lower interest rates eventually stimulate demand, and help the economy recover.

Housing and the Economic Cycle

All things considered, it was not surprising to hear of continued struggles in the housing market, and it is no coincidence that recent new construction levels were being compared to 1991, since that was also a recessionary period. Here again though, we can see the seeds of an eventual recovery being sown. Shoring up home prices will require clearing up the oversupply of homes on the market, and easing up on building new ones is a good start.

Government officials have made almost a game of avoiding acknowledging a recession, and the problem with this is that denying the economic cycle does not leave the public with a clear vision of how those cycles play out. America may be in for a period of belt tightening, but it can emerge from that with less debt, lower prices, and lower interest rates. Anyone with a steady job and sound credit can see signs of that already, just by checking out the housing and mortgage markets.

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