Amortization Plan

Mortgage rates have a lot to do with how well the economy is performing. When mortgage rates go up, people can no longer afford to invest money in new properties. This, of course, brings a slow down to the building trade and it also means less money will be flowing through the economy.

On the other hand, when mortgage rates go down, more people are able to buy homes. The further down rates fall, the lower the income needed to buy homes. When homes are being bought, the building trade flourishes and this stimulates the economy in many ways.

Remember high interest rates?

It’s been 20 years since we’ve seen double-digit mortgage interest rates. Going back to the late ’70s and early ’80s, double-digit mortgage rates were the norm. It wasn’t until about 1985 after the Reagan administration had put an end to stagflation and the misery index that haunted the Carter years, that mortgage rates found buoyancy at around 7%.

Since that time, mortgage rates have fluctuated between 9% and about 5.5%. All in all, it has been a long stable interest rate environment that we have enjoyed over these past years.

Higher or lower?

Now, the question is where do interest rates go from here. By reading the charts, we will attempt to predict their future movement, just as if we were reading the commodities charts to get a handle on which way the price of soybeans were headed. Then, we’re going to make a prediction about another commodity that is sure to be shocking!

At this time, it is wise to make a disclaimer. First, no one can truly predict the future and second, any world event can change what the future looks like now in a heartbeat. Also, you can’t overlook the fact these unforeseen world events can happen out of the blue. With that behind us, let’s take a look at charts.

The past 18 years

Throughout the ’90s, interest rates on 30-year fixed mortgages ranged between 9% and 7%. At the time George W. Bush took office, the average 30-year mortgage rate was 8.75 %. From here, it eased downward steadily through the first George W. Bush term. It actually hit a low of 4.75% in late 2003. Here, interest rates ranged between 6.5% and about 5.5% for the next 3 years. This was an uncommonly stable interest rate environment and it was one of the reasons the housing market became red hot, and yes, overbought.

In 2006, the trend broke above 5.5% to about 6.5%, but rates never went any higher. Now, the interest rates are hovering around six percent and trending downward.

Reading the charts

The technical trader, that is, one who trades commodities by reading charts, would certainly believe interest rates, since they are heading downward, would have to once again test the low of 4.75%. It will be important to see if a double bottom is made at 4.75%. If this bottom is made, interest rates will go up.

Because of underlying fundamentals of the market, for instance the Fed trying to lower interest rates to stimulate the housing market, it seems much more likely interest rates will break through the 4.75% low once they arrive there. If they do, a new downward trend will be on the way. Just how much lower interest rates could get, is anybody’s guess. However, it certainly isn’t out of the question we could see 4% 30-year fixed mortgage rates sometime before this downward trend ends.

4%!

Historically speaking, 4% is a very low interest rate, but at this time it truly looks like we are much more apt to see 4% than a higher number, like 7%. So, for what it’s worth, this is my prediction. We will see the interest rate on a fixed 30-year mortgage somewhere down around 4% before an inflationary aspect of the economy takes over.

Where you think this inflationary aspect will come from? Well, here is another prediction and you may find it more astounding than the first one!

The impossible dream

It’s all over for the crude oil rally. Crude oil is overbought! There is no reason for crude oil to be trading above $100 a barrel. Like the tech stock boom of the ’90s and the housing market bubble of a couple years ago, it is a rally that cannot be sustained forever!

It’s anybody’s guess as to what the true market value of crude oil is right now. However, to think it is somewhere between $50 and $60 a barrel would be logical. However, when prices fall they tend to go through the true market value before they float back up to it.

If this crude oil market bubble burst follows the same modus operandi normal market bubble bursts follow, I can’t see why it is impossible to see $35 a barrel crude oil again; at least for a little while.

What would this mean for the price of gas? Maybe $1.49 a gallon? Well this may seem totally out of whack with what we’re hearing constantly coming from our news reports day and night, don’t think it can’t happen.

Back to reality

Certainly, there will be a time when $100 will not be too high a price for a barrel of crude oil. There will come a time when $3.50 is not too much for a gallon of gas. However, the charts are telling us that time is not here yet.

So, cheap gas, like the JFK, Ronald Reagan and George W. Bush tax cuts will stimulate the economy, and like the Bill Clinton Tariff agreements, it will make the cost of living lower which will make more goods affordable to the public. These things, though healthy for the economy, will bring on some inflation and this will break the interest rate downtrend.

I know these predictions seem pretty goofy and maybe they are! Still, my strategy is to believe they will happen and if they don’t, at least I’ll be happy believing them for now. Then again, if they do happen, we’ll all be happy!

By: Edward Lathrop

Tags: 30 Year Mortgage Rate, Commodities Charts, Flourishes, Heartbeat, High Interest Rates, Mortgage Interest Rates, Stagflation, Time Mortgage
Posted in Real Estate · January 21st, 2010 · Comments (0)