Waiting to exhale: Mortgage rates halt their brief climb

Posted by  on Sep 21, 2012

It's safe to exhale now, but for a while there in August mortgage rates had potential home buyers holding their breath. For one four-week stretch, mortgage rates rose each and every week. They soon subsided, but it was a reminder that today's interest rates are something of a rare gift for home buyers -- and they are not to be taken for granted.

Three keys to the future of mortgage rates

So what are mortgage rates really up to? Was their rise in August just a brief aberration or a hint at things to come? The following are three reasons that suggest interest rates will remain low:

  1. The economy remains soft. The US economy is growing, but just barely. Until the economy -- and most significantly, the job market -- sustains any momentum, there will be little support for higher interest rates. With a long-running budget debate in Washington and serial crises in Europe, economic momentum may remain elusive.
  2. The Fed remains steadfast. It's a matter for debate whether the Federal Reserve's low interest rate policies have helped the economy, but there is no doubt that the Fed is committed to them. Having done just about everything it can to lower rates, the Fed has focused on extending the length of its commitment to low rates. With the Fed talking about low interest rates in terms of years rather than months, monetary policy looks likely to support low rates for the foreseeable future.
  3. Inflation remains benign. It was a hot summer in most of the country, but inflation remained cool. This is critical to maintaining low mortgage rates. Mortgage lenders are not going to make loans if they believe inflation will negate any interest they earn, and already 3.5 percent mortgage rates represent something of a risk in this regard. If inflation perks up, mortgage lenders will have to raise rates or simply stop making loans.

All things considered, it seems inflation is the most likely factor to upset the low mortgage rate environment. August provided a quick reminder of the reality that mortgage rates can rise as well as fall. But if inflation becomes troublesome, the next reminder may have a more lasting impact.


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