Wednesday, July 25, 2007

What is going to happen with Interest Rates?

OK, the water is chest deep now. I started wading in here, and I just don't know when to stop.

So, what do I see happening with interest rates? Overall, I see them going down. But, I think they'll go up first. Was that vague enough that I can claim victory no matter what?

First, the case for rate rising. In the short term, I see rates going up a bit. Not a lot, but somewhat. We won't even get close to the credit card looking rates that Jimmy Carter left the mortgage market with, but rather people will think that 7%, or maybe even 8% was a deal. With the meltdown of the sub-prime market, and the looming foreclosure crisis, the expenses that lenders have are going to go up. In order to recapture those expenses, I see the rates going up a between 1.5 and 2 points. But then, the rest of the market is going to catch up.

Now, the case for rates falling. After that short term bump, rates will need to drop. Oddly, the SPM (Sub-Prime Meltdown) will be responsible for that as well. The result of this SPM will be that fewer people will qualify for mortgages. The ones that will qualify will be more stable. Therefore, there is less risk. However, and more importantly, since the pool of mortgage buyers will be smaller, there will be increased competition to get them. Face it, money is the ultimate commodity, so the best way to compete is to make it cheaper. Expect to see savings interest rates suffer as well. Supply and demand will require that mortgage rates go down. If there is more money available, and a smaller market for that money, the price has to go down. So {brace yourself for a bold prediction}, I think that by 2009 or 2010, unless there has been a fundamental change in the market, we'll be looking at mortgage rates back in the 5.5% range.

As always, I look forward to your ratings and comments. I'd love to know what you think.

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