Former Fed Chief Alan Greenspan made common the adage "conundrum." When it comes to predicting mortgage rates, a person will also experience a similar type of conundrum. The country is now having a tug of war unfold between two tremendous forces that control mortgage rates. Each is pulling in a unrelated path. Correctly determining which side will reign will mean the difference between mortgage rates predictions that are exactly on the money, and mortgage rates predictions that are way off of what really occurs.
At the very core of the issue on one side there is a rapidly slowing economy exerting force on mortgage rates to tumble. In addition to that there is a oversupply of homes available on the market and a inadequacy of home buyers. This puts formidable pressure on mortgage rates to sink. But on the opposing side there is inflation increasing.
Rising inflation forces mortgage rates to rise. If I let you borrow $1,000 today for a span of one year, and inflation results in that same $1,000 to only be able to purchase the present day's $900 worth of products one year from today, my $1,000 is really only worth $900 when you take into account inflation. If are going up by 10% per year (and gas, heating, and food prices are rising by even more), I would have to be get back at least 10% more one year from today just to come out even.
The basis of inflation is central bankers printing too much money out of nothing. Just as wet streets are an indicator of rain, rising prices are an indicator of inflation. Rising prices are not inflation, they are merely a symptom of the real plight: dilution of the value of money. This dilution is a ramification of too much money printing by central banks and governments. It's not that prices are rising, it's the worth of money going down.
The loftier the inflation rate, the greater the yield that lenders demand in order to lend money. Normally, lenders seek a real profit of at least 2%. That's 2% above whatever the real rate of inflation is at.
With the Federal Reserve printing money like crazy to rescue Wall Street investment houses, as well as printing money like crazy to pay for government deficit spending, inflation will continue to increase. It is extremely likely that predictions of higher mortgage rates to come with every passing month will be accurate.
Despite a deteriorating economy, growing inflation will cause lenders to require higher interest rates. The time of dropping mortgage rates are long gone. The most accurate mortgage rates predictions are for step by step increases the second half of 2008 and into 2009.
