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Where are Mortgage Rates Headed in 2003?

by Henry Savage

What's going to happen to mortgage money this year? Should you wait a few months before refinancing, hoping to get an even lower rate? Should you speed up your home search, fearing rates will run away and make buying a home more expensive?

On January 29, Alan Greenspan and the Federal Reserve Board decided to leave short term rates unchanged. The Federal Funds Rate, which is the rate the banks charge each other for overnight funds, remains at 1.25 percent - the lowest in 41 years.

The Fed Funds Rate isn't directly related to long term mortgage rates, but you can expect home equity lines and credit card rates to remain the same.

That's the first clue. Alan Greenspan will raise the federal funds rate if signs of inflation appear. Inflation will ultimately cause mortgage rates to rise. There's no inflation on the horizon.

Chalk one up one for low mortgage rates in 2003.

However, a recent survey of institutional investors predicted higher rates for long-term financial instruments, such as mortgage-backed securities. Here's the logic:

Although the economy is sluggish, there appears to be some improvement in growth. This will translate to improved corporate earnings and eventually an improved stock market. The stock market will then compete for investment funds and take away money from mortgage backed securities. This will cause mortgage rates to rise.

The Bush Administration's plan to cut taxes and boost spending may result in the issuance of new long-term debt. If new treasury bonds flood the market to fund the deficit, the price of these bonds will drop, cause the yield to rise. And since long-term mortgages are tied to treasury bonds, mortgage rates will follow.

Chalk one up for higher rates in 2003.

But as I continued my web-surfing, I found lots of experts predicting that rates will remain low at least until mid-2003. Here's why:

The Iraq situation. Geopolitical uncertainty breeds panic and chaos in the markets. An increase in interest rates would only exacerbate an already jittery marketplace.

Continuing reports of a sluggish economy. Despite two years of low mortgage rates, saving millions for American homeowners, the economy is not rebounding. Unfortunately, consumer spending alone won't necessarily revive the economy. The problem arises in a lack of corporate spending. Businesses just aren't spending any money or hiring any workers. This is preventing robust economic growth. In fact, some argue that the refi boom is preventing economic disaster.

Very low inflation. The Fed raises interest rates as a defense to inflation, which can be very dangerous for the economy. Consumer prices increased a mere 1.90 percent in 2002 - certainly not enough to warrant a rate hike.

The 9/11 factor. Although Alan Greenspan has noted many times that the American economy displayed "remarkable resilience" in the aftermath of the 9/11 attacks, the economy continues to struggle as a result.

Corporate scandal and bankruptcies. The Enron mess, lifestyle guru Martha Stewart in hot water, United Airlines bankrupt, USAirways belly-up - need I say more? These things aren't exactly going to jumpstart the economy.

Here's the bottom line. NO ONE KNOWS FOR SURE. Inflation and economic growth are the key indicators. If inflation remains in check and the economy doesn't catch on fire, mortgage rates will remain low. However, if the economy roars back, it's bye-bye low mortgage rates and refi opportunities.

My guess? I'd say we've got quite a while before the economy becomes robust. And that prediction is worth exactly what you pay for it.

Published: February 5, 2003

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.

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