Interest rates dip to historical levels in July of 2010

Interest rates dip to historical levels in July of 2010

Even with Freddie Mac's announcement this week that the interest rate on U.S. home loans has fallen to a fifty-year low, speculation suggests the current trend may not last following November's elections. A look back at interest rates from as early as 1971, shows much higher rates during economic conditions similar to those of 2010. In the waning years of the Carter administration for example, the U.S. was facing record unemployment and taxation, staggering inflation, and mortgage rates topping 18 percent. With the exception of inflation, things today look eerily similar to 1980. With July mortgage rates hitting all time lows, one is left to wonder how long they could stay.

If rates do begin to climb this winter, here are two potential contributing factors:

Inflation

Using the Carter years as a benchmark, it must be noted that inflation was a staggering 18-19 percent at that time. Comparatively speaking, our current inflation rate of just over 2 percent is nothing. But when you figure in the 2008 $700 billion TARP program and the $825 federal stimulus package from 2009 it raises some red flags regarding inflation.

The government's excessive spending has added trillions to the federal deficit at a time when the nation's economy is still in recession. The result is a debt service which continues to consume more and more of the total budget, an increase in taxes to help cover some of that cost, and an increase in the money supply as the government attempts to cover its losses by printing more cash. Together, all of these factors have created a ticking time bomb of inflation. When that bomb goes off, and it will just as it did during the late 70s and early 80s, interest rates will follow.

Falling Real Estate Values

Like it or not, the burst of the housing bubble in 2008 brought artificially high property values back into line with reality. Similar to a stock market "correction", property values are now on their way down to what they would have been had the federal government not propped up the housing market in the early part of the decade. As a result millions of Americans are finding themselves under water, meaning the current value of their home is less than what they owe on the mortgage. Rather than sticking it out many are simply packing their bags and walking away. The losses being suffered by lenders will inevitably have to be made up somewhere, hence, higher interest rates.

While historically low mortgage rates have been good for home buyers, don't count on the trend lasting forever.

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