The intrepid action by S&P to finally break the seal on the illusion of the US credit quality and lower its debt ratings has people wondering about the future of interest rates and specifically, mortgage interest rates. Unfortunately, most real estate professionals are still holding on to inadequate elementary school conceptions of US sovereign credit risk on interest rates and giving misguided advice about the direction of mortgage interest rates.
As I’ve been discussing on my blog since the start of this year, the direction of mortgage interest rates should be headed lower for a variety of reasons (loose monetary policy, fear trade, etc.) and not upwards as many real estate professionals have been suggesting. Simply, just because mortgage interest rates are at all time lows, it doesn’t preclude them from going lower. Suggestions that rates must go up for no other reason than being at record lows just reflects a poor understanding of modern economics.
In any case, buyers should not buy simply due to the expectations that mortgage interest rates are going up. Even if mortgage interest rates go up and drive up mortgage payments, the resulting decline in affordability will simply reduce demand and lower home prices. So, it becomes cheaper to buy later.
Conversely, if mortgage rates are headed lower, as they are now, we should expect home prices to climb in the long run as mortgage payments continue to get cheaper as compared to rent. However, with employment so weak and holding back demand, home prices will stay low until unemployment drops below 7.5%. With the S&P downgrade, further complicit downgrades of US debt from the other ratings agencies, Moody’s and Fitch, are to be expected in the coming weeks.
As a licensed financial advisor, I work with each client to determine whether it makes sense to buy under their personal financial circumstances. Often, I make the difficult recommendation to delay the purchase, even if they are financially qualified and eager to buy. Having been burned personally by over-eager and self-interested agents in the past, upholding my fiduciary duty to my clients is frankly the only way I can sleep soundly at night. Anything less would be just lazy and irresponsible.