By far, the dominant news story this week was the election of Barack Obama as the 44th President of the United States. While people have different ideological views on what this means to the nation, it is also natural to view any news of this magnitude through a lens of personal self-interest. For anyone contemplating buying a home, the question of self-interest that comes to mind is: what will an Obama Administration mean to mortgage rates?

Specifically:

• What will be the impact of Obama on the current financial crisis?
• What will be the impact of Obama’s long-range fiscal policies?

Looking at the recent news provides some perspectives on what the Obama Presidency will mean for mortgage rates, both short-term and long-term.

Short-term Impact: Dealing with the Financial Crisis

In the near term, the financial crisis is likely to be highly disruptive to interest rates — making them volatile, and perhaps driving them upward for a while. This would have been the case regardless of who won the election. The hands of the President-elect are somewhat tied for the time being, and not just because the inauguration isn’t until January. The existing budget deficit, the $700 billion bailout package that has already been passed, and the low level of Federal Reserve rates all mean that government policy is pretty much already committed.

With regard to mortgage rates, the disruptive forces involved in all this are numerous:

• Already, the reluctance of banks to lend has driven the risk premium of credit sharply higher – meaning that despite the efforts of the Fed to bring interest rates down, market rates have moved higher
• The federal deficit as a percentage of GDP could surpass the modern record of 6.0% set in 1983 – a year in which 30-year mortgage rates averaged 13.24%
• With the U.S. dollar potentially under pressure due to the extremely low level of the federal funds rate, the good news was that the Bank of England and the European Central Bank both decided this week to cut interest rates as well. The bad news is that these rates remain considerably above the federal funds rate.

In short, for reasons of credit risk and the possible re-emergence of inflation pressures, interest rates may continue to be volatile and subject to occasional spikes upward.

Long-term Impact: Fiscal Policy

Much was made during the campaign about some of Barack Obama’s past associations, but on the economic front, it is some of his current associations that provide reason for optimism. Obama financial advisors have included Robert Rubin and Lawrence Summers, veterans of the Bill Clinton economic team that helped guide the country to budget surpluses and low inflation — both of which are conducive to lower mortgage rates. Obama has also sought advice from such luminaries as Warren Buffet and Paul Volcker, both of whom are respected across the political spectrum.

In summary then, expect continued disruptions to mortgage rates for the time being, with things settling down with a return to fiscal responsibility in the long run. For mortgage shoppers who don’t want to wait for the long run, now may be the time for anyone who can afford current rates to shop for a mortgage, before further disruptions take effect.

Tags: bailout, Clinton, federal funds rate, Federal Reserve, financial, mortgage rates

This entry was posted on Thursday, November 6th, 2008 at 12:09 pm 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.