Alan Greenspan made common the adage "conundrum." When it comes to predicting mortgage rates, a man will also experience a similar type of conundrum. The country is currently having a gigantic tug of war play out between two immense forces that control mortgage rates. Each force is pulling in a unrelated route. Correctly anticipating which side will triumph will determine the difference between mortgage rates predictions that are exactly on the money, and interest rate forecasts that are entirely off of what actually occurs.
At the very core of the issue on one hand you have a rapidly slowing economy putting power on mortgage rates to tumble. There is a overstock of houses available on the market and a deficit of home buyers. This puts formidable pressure on mortgage rates to fall. However, on the converse side you have inflation rising.
Increasing inflation forces mortgage rates to rise. If I lend you $1,000 today for a duration of one year, and inflation causes that same $1,000 to only be able to purchase the present day's $900 worth of services one year from today, my $1,000 is really only valued at $900 when you take into account inflation. If are going up by 10% per year (and gasoline, energy, and food prices are going up by even more than that), I would have to be repaid at least 10% more one year from today just to come out even.
The trigger of inflation is central bankers printing too much money out of thin air. Just as wet streets are a symptom of rain, rising prices are a symptom of inflation. Rising prices aren't inflation, rising prices are only a symptom of the real morass: dilution of the value of money. This dilution is an effect of an excess of money printing by central banks and governments. It's not that prices are going up, it's the value of money falling.
The greater the inflation rate, the higher the yield that lenders require in order to lend money. Normally, lenders require a real return of at minimum 2%. That's 2% on top of whatever the actual rate of inflation is at.
The subprime mortgage crisis has caused a great deal of stress to the financial system and with the Federal Reserve printing money like crazy to rescue Wall Street investment houses, as well as printing money like bonkers to cover government deficit spending, inflation will continue to rise. It is highly likely that predictions of higher mortgage interest rates to follow with every passing month will be correct.
In spite of a deteriorating economy, higher inflation will cause lenders to require higher mortgage rates. The time of dropping mortgage rates are long gone. The most accurate
mortgage rates predictions are for continual increases later 2008 and into 2009.
