Mortgage Rates Will Stay Low, Why?

With the housing market clearly in a slump, the New York Times had a piece this morning asking how fast the housing market is heading down. In presenting the case for a gradual and limited decline the article asserts that �mortgage rates are still relatively low and look to stay well below rates common in the past.�

Mortgage rates certainly are still relatively low, but the question is why we would expect that they would stay low? Do the projections for large budget deficits convince us that interest rates will stay low? Maybe the fact that inflation is at its highest level since 1990 makes people believe that mortgage rates will stay low. Perhaps the record U.S. trade deficit, which will push the dollar down in the years ahead, is the reason that we expect low interest rates. After all, investors are always willing to sacrifice returns if they get to hold a currency that is falling in value.

In short, all the factors that economists ordinarily believe affect interest rates point to substantially higher interest rates in the future. It would have been interesting if the article could have presented an economic argument supporting the opposite case. If mortgage rates creep up to levels more consistent with past experience (e.g. 7.5-8.5 percent), the housing market will adjust far more quickly to its trend levels. Let�s see how interest rates respond to this month�s inflation data.

--Dean Baker

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