Where will mortgage rates go after the US downgrade?
Well, the unthinkable has happened! The United States’ credit rating has been lowered for the first time in its 70-year rating history. The stock market was severely punished for it. The Dow has seen two days of -500 or more points in the last week with no bottom on the site. What we thought was a correction now appears to be a widespread market sell-off.
But how will all this affect mortgage rates? So far, it has been very good for rates. We are once again near our all-time lows. Generally speaking, mortgage rates will follow the bond market. When people jump out of stocks, they usually switch to bonds to park their money. When more people buy bonds, bond yields go down and therefore we have lower interest rates. This is how it usually works.
However, the problem is that it is not an ordinary liquidation. The reason the stock market crashed is because of the loss of confidence in America’s ability to never default. America’s default on debt would have been unthinkable years ago, but we JUST saw it last week. So investors are scared, but ironically they are still buying US Treasuries anyway. Why? Probably because there is nowhere else to go. The euro is in as bad a condition, if not worse, that the dollar and the dollar is still the world’s reserve currency. On top of that, investors saw the government come to the rescue moments before the default and that likely restored people’s confidence that they will never default (although this was a very close decision).
How long can these conditions last? Probably not much more. Eventually, the rates will have to go up. Right now, rates are so low that investors aren’t really earning far enough to keep up with inflation. People are literally buying American debt because there is nothing else to buy that feels safe to them. But remember, fees are artificially low right now and can’t stay that way forever. Eventually the market will demand higher rates for our debt and when it does, BEWARE! Higher rates will mean that the US will have to print even more money to pay off its debt, which will mean more and more debt ceiling issues and more loss of confidence in the dollar and Treasuries.
However, until that happens, you can also save yourself some money by refinancing or buying a home now at the lowest mortgage rates you’ve ever had.