Where
are mortgage rates heading
Mortgage rates are influenced by long-term rates, which are influenced
by three factors: (1) Short-term rates -- economic weakness suggests the
Fed is likely to reduce rates, (2) Inflation -- inflationary expectations
are near forty-year lows and (3) the Overall Economy -- the DJIA and the
S&P 500 are near their lowest levels since 1997 marking the worst
bear market since the 1930s. Although today's mortgage rates are attractive
in absolute terms, they remain high relative to the broader credit markets.
The spread between the Fed Funds Rate and 30-Year Mortgage Rates is at
a 10-year high, suggesting mortgage rates will continue to fall, potentially
below 5 percent
As mortgage rates continue to trend downward, many investors are focusing
-- not upon how low mortgage rates will ultimately go -- but rather, upon
when the trend will reverse itself. This pessimistic thinking is unwise.
Adding to the problem, mortgage market bears have been especially outspoken,
suggesting that long-term rates are sure to rise, thereby spelling trouble
for mortgage lenders. This hypothesis is unfounded. Long-term interest
rates influence residential mortgage rates directly, and are themselves
influenced by: (1) the Federal Reserve's manipulation of short-term rates,
(2) inflationary expectations, and (3) the strength of the overall economy.
Taken one by one, analysis of each of these market forces reveals that
mortgage rates actually have further room to fall, and are likely to fall
throughout 2003.
