Are mortgage rates increasing or decreasing? |

Are mortgage rates increasing or decreasing?

William DesPortes

As some of you may know, on Aug. 8 the Federal Reserve Board and Fed Chairman Ben Bernanke did not raise the federal funds rate, or the short-term lending rate, for the first time since June 2004. Hallelujah!But wait, what exactly does this mean and how does this action affect consumers and our mortgages? The answer to that question requires a little bit of investigation and economic insight.Since 1989, the Federal Reserve Board has only raised the federal funds rate four times or in four cycles. The most recent cycle of rate increases began in June 2004, when the federal funds rate was at a historical low of 1 percent. Today the rate is at 5.25 percent. A look at the historical data reveals that when the Fed ceased raising rates, they began actually decreasing the rate within four to 16 months. For example, May 17, 2000, the Fed raised the short term lending rate to 6.5 percent from 6 percent. At the next meeting on June 27, 2000, the Fed did not raise the rate. The rate stayed at 6.5 percent until January 4, 2001 (7 1/2 months), when the Fed reduced short term rates to 6 percent. This was the first rate reduction in a cycle that lasted until June 2004, taking the fed funds rate all the way down to 1 percent. We all remember this time as having historically low mortgage rates. How many times did you refinance your mortgage between 2000 and 2004?Does this mean that in four to 16 months from now the Fed will actually start reducing the short-term lending rate, possibly creating favorable mortgage refinance scenarios? The answer to that question is wellpossibly. The correct answer is that the fed funds rate and long-term mortgage rates are dependent on the direction of the economy and its inflation. If one looks at the most recent major economic numbers, on July 28 the gross domestic product of the U.S. economy was weaker than anticipated second quarter number of 2.5 percent growth (5.6 percent was reported in the first quarter of 2006) and Aug. 4 showed a weaker than anticipated jobs growth number (113,000 reported vs. 145,000 anticipated for July 2006). Two key inflationary reports, the CPI and PPI (Consumer Price Index and Producer Price Index) also reported weaker than expected economic growth on Aug. 15 and 16, indicating less inflation in the economy. The indication from these reports is that the Fed may have done its job of controlling inflation, with its 17 consecutive rate hikes, but in all actuality it is a little too soon to make this determination. If future economic reports continue to show mild inflation in the economy, then the Fed was indeed successful. If this is the case, then we could be in for a period of relatively stable interest rates, hovering close to the levels seen today.If the Fed went too far in its rate increases, and actually stifled economic growth, then the national economy could be headed for a recession (The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP; 1st quarter of 2006 to 2nd quarter of 2006 is one quarter of decline). If this is the case, then we may actually see a dramatic decrease in interest rates as an effort to restart the national economy. This could lead to circumstances similar to the early 2000s.A worst case scenario would be a recession actually initiated by the Fed purposely increasing interest rates. This scenario occurred under President Regan in the early- to mid-’80s as an effort to curtail stagflation (worst case scenario of price and wage inflation w/ slow economic growth). This topic requires a column of its own. The fact of the matter is that we are in the midst of economic uncertainty right now. As I have often said, a mortgage is a key piece if not the centerpiece of a financial portfolio. The factors mentioned above, and direction of the economy, do make a tremendous difference in what mortgage is best suited for a client, their needs and economic goals. So make sure that your lender is trustworthy and aware of all influencing factors. William DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at (970) 949-0653 or wdesportes@qwest.netVail Colorado

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