Very very affordable mortgages are arguably the most effective policy the government has enacted to pull the economy out of the recession. But many people worry that mortgage rates are going to rise this year, possibly quite a bit and thus the improving economy could hit the skids. How likely is this to occur?
There are three reasons interest rates are so low.
-First there is demand for US government bonds and buyers are willing to accept the low yields they offer at this time. They are deemed safe in an uncertain world and some foreign countries such as China are accumulating US dollars from their trade surpluses that need to be parked somewhere reliable. These low rates are setting the floor in the market.
-Second, our Federal Reserve is buying new mortgages as they are being originated in a kind of subsidy that is intended to help the economy by creating financing and lowering the cost of home ownership. This policy is an indispensable aspect of the emerging recovery.
-Third, the inflation rate is very low and therefore interest rates should be low.
Unemployment over 10% is the biggest single influence at this time over interest rates. Such high unemployment means the government cannot back off from helping the economy and the mortgage supports must continue. It isn't wise and it is politically impossible to alter this policy for the visible future. As 2010 begins we are hearing that jobs creation is the biggest economic priority for the Obama administration. A recovery in housing is a key requirement and for jobs to be created the US is going to need those cheap mortgages for sometime.
High unemployment means labor costs aren't going to rise and inflation is going to be muted. Inflation should not be pushing on these rates for sometime and this is another reason for interest rates to stay low.
The third factor may not be so favorable. Investor demand for US government bonds could become an issue. It may take higher rates to keep them buying. Why? The huge deficits we continue to run are going to undermine that market as the quantity of US bonds in the world exceeds the demand. Will this happen and if so will it be later than sooner? We'll see. It isn't in anyone's interest for the US economy to crater and it seems adjustments to the bond market are going to be orderly. This is a factor that will push rates higher theoretically. In reality, it has yet to be seen.
So the interest rate market seems set for a moderate increase in rates but given how unlikely employment is to improve a great deal or inflation to rise, we are going to continue to see what are historically very good deals on mortgages. Get one today if you can!
