The slumping national housing sector helped slow U.S.economic growth in the third quarter to its weakest pace in more than three years, the Commerce Department reported at the end of October. Leading financial markets to raise bets on interest-rate cuts next year. Gross domestic product, which measures total economic activity withinU.S. borders, expanded at a 1.6 percent annual rate during the third quarter, down from 2.6 percent in the second quarter for the slowest advance since the first quarter of 2003. But the 2006 year to date bond yield peaked out in late June, and have since rallied across the full range of maturities. This occurred as investors bet it meant the Federal Reserve was less likely to raise interest rates and might tip toward reducing them in early 2007.
At its most recent committee meeting, the Federal Reserve (Fed) again declined to raise rates for the third time, citing – in part – a slowdown in the housing market. For instance, the median price of existing homes posted an all-time record decline of 2.2 percent in September (year-over-year), and median prices of new homes fell 9.7 percent, representing the largest decrease since 1970. In addition, some areas of the country may experience a few bumps up and down as the housing industry corrects itself in the coming months. The Fed left its federal funds rate at 5.25 percent in its late October meeting. It has been at that level since late June when the central bank raised rates for a 17th consecutive time in a two-year effort to combat rising inflation. The decision to keep the funds rate unchanged means that the prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25 percent.
The Fed has now extended that pause for three straight meetings. Many economists believe The Fed will leave rates unchanged for perhaps as long as a year as they watch to see whether the economy follows the Fed’s hoped-for scenario of slowing enough to cause inflation to retreat from current levels.
Predicting mortgage interest rates just gets harder as time goes on. In the “olden days” all an expert had to do was predict what everyone else thought the economy would do. The anticipation of how the economy will perform is the key. But other major factors have now emerged. For example, the issue of world terrorism and political instability i.e. (North Korea and Iran) have become far more important factor as any negative events creates what we call a “Flight to Quality” This means that worldwide financial markets will run to the quality and security of the US Treasury Bonds as the safe haven for their investments. Thus, the pressure at times to bid up prices, and conversely push interest rates down as the markets flock to the security of the US in those unfortunate occasioned frenzies.
Interest rate movement has been pretty steady in 2006, whether it has been on the up side or the down side. There does seem to be some risk of inflation, but lower gas prices and a slowing economy help keep inflation in check, so there isn’t much danger. At the same time, prices may be creeping upward because of the spike in oil prices over the last year. Products made from petroleum products (like plastics) will inevitably increase in price, too.
Interest Rate Future
Mortgage rates should stay fairly stable and even though the trend looks like it is heading down, things could move either way — but slowly.
Joseph Levy, is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA. Mr. Levy received his MBA Degree in Real Estate Investment Finance from University of Connecticut.
The opinions expressed here are strictly those of AFFILIATED CAPITAL RESOURCES and are subject to change without notice. AFFILIATED CAPITAL RESOURCES is a mortgage banking firm which advises accounting and business management firms pertaining to residential and commercial real estate financing services for their clients. DRE License No. 01125517
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