Why We Could See Mortgage Rates Drop
Yesterday I wrote up a blog post on a few different reasons on why we should continue to see a rise in Rise in Mortgage Rates. Today i'm going to go over a few things that could actually cause Mortgage Rates to drop. There are lots of reason why either one could happen but i'm just going to go over a couple of them.
Recession
According the government we aren't in a recession and the economy is going great. So this shouldn't be an issue, right? Not only are we going to be in a recession, we are in a recession right now by the very definition of it. The definition of a recession is two consecutive quarters of a decline in the gross domestic product (GDP). The first quarter and second quarter both declined and as soon as we get the third quarter numbers in we will have three straight quarters. And if I had to guess after quarter four we will have four straight quarters of a GDP decline. I would imagine this administration will end up doing what the Clinton Administration did, in changing the definition of the CPI, and change the definition of what a recession is considered. Either way though, we are currently in a recession, and just the start of probably a long one. Typically during a recession we will see Mortgage Rates decline. The reason this happens is because of simple supply and demand. During a recession there is less money being lent by lenders so they have more to lend, usually causing rates to drop a little. Right now we have the lowest amount of Mortgage applications in history. Meaning right now there are less people applying for mortgage loans than ever before. This could be good for mortgage rates declining.
The Bond Market
I won't talk too much on the bond market and how it affects Mortgage Rates only because there is so much that goes into it. As we talked about in the last post, Mortgaged Backed Securities have the biggest impact on what Mortgage Rates do. Now the reason MBS have an affect on the bond market is because essentially two of the biggest things Wall Street is looking at everyday is the bond market rates, primarily treasury bonds, and mortgage backed securities. Whichever is the better deal for the day is what Wall Street is going to invest in. On September first the Fed, again, announced they are no longer going to be buying up mortgage backed securities. Typically when that happens Wall Street loses confidence in mortgage backed securities so they in return start buying more in the bond market. If this trend continues we will probably see mortgage rates rise, but it's so unpredictable right now on what the Fed is going to do so it's hard to say.
The Rate of Economic Growth
Economic growth indicators, such as the GDP and the employment rate, influence mortgage rates. With economic growth comes higher wages and greater consumer spending, including consumers seeking mortgage loans for home purchases. As mentioned above though we have seen two straight quarters of GDP decline and probably more coming. Our unemployment rate as at an all time high. If we were to go by pre Clinton CPI numbers, unemployments is around 21%, which would be the highest ever. We aren't seeing higher wages, consumer spending is starting to come down, and as we've already talked about, mortgage applications are at an all time low. All of this is, for the time being, bad for our country, but could be good for mortgage rates coming down.
The Conclusion
