Mortgage Rates – Predictions

Making predictions is always a dicey affair. When it comes to mortgage rates, predictions are difficult, but not impossible.

For the sake of credibility, let’s note we are writing this article on March 4, 2008. I always find it interesting how various media gurus seem to adjust their recollection of past predictions to match what subsequently happened. We’ll avoid that here and live on the edge!

Actually, mortgage rate predictions are not always that difficult to make. In the current market, for instance, mortgage rates are headed in one direction and one direction only. Consider the following to understand why.

We have a problem. The dollar is losing value. In fact, it is getting crushed. Why? Well, it has to do with the interest rates to borrow money. Simply put, our rates are at historic lows thanks to the Federal Reserve Bank. This low interest rate makes the dollar and dollar based commodities a bad investment.

Consider the dollar versus the Euro.  If you owned 100 Euros and 100 Dollars in 2000, they would have been worth roughly the same. Now? The Dollar is worth roughly 65 percent of the Euro. As a potential investor such as China, are you going to invest in US Treasury notes based on the dollar or some other currency like the Euro? The answer should be obvious.  To overcome this problem, we need to raise interest rates to make the dollar more attractive.  There is, however, another problem.

After years of steady growth, the economy is dead in the water. The housing mess certainly hasn’t helped, but a slow down is a natural part of any economy. In short, we shouldn’t be surprised by this.

So, how do you rev up an economy? You lower interest rates. This makes money easier to borrow. People and businesses flush with borrowed money will spend it, which gets the economy moving again.

As you can see, the current situation creates a catch-22 for the Federal Reserve. Do the increase interest rates to help the dollar or lower them to get the economy moving again? Well, this is where our prediction comes in.

In the first quarter of 2008, the Federal Reserve Bank has shows in cards. It has lowered the interest rate a number of times. In short, it has picked juicing up the economy over worrying about the dollar. This trend can be expected to continue until the economy starts perking up, which should be no sooner then the end of 2008.

When it comes to mortgage rates, predictions are all over the board. Ours is mortgage rates will continue to drop through the year for reasons expressed above.

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