Rob's Rant

SO WHAT??  You may ask.  This blog is about Mortgages, right?

Everything is related.  A weakening dollar is the result of an expansion of the money supply (more dollars mean each one purchases a little less stuff).  Some Economists consider the weakening of the dollar to be Inflation, others (notably Austrian Economists) point out that Inflation is the monetary expansion itself and the weaker dollar is the result.

Also, traditionally, in times of rampant Inflation, gold has been one of the best stores of value available. 

So a weakened dollar and a run-up in gold prices mean that the Market is pricing in future Inflation. 

In times of Inflation, other investments that do well (besides gold) are commodities and Real Estate.  Interest rates also skyrocket during Inflationary periods, no matter what the Government would like them to do.  This is because the person or bank or whoever is lending the money must factor in the fact that the dollars s/he gets back have less value than the ones s/he lent out.  Therefore s/he must get more of those dollars as a return--meaning a higher rate on interest you must pay.

Real Estate is a little more complex in today's environment.  With our Government's meddling in this market (which started way back in the 1930s and has gotten progressively worse ever since) it seems no end is in sight.  Now many people are (finally!) looking at the Option ARM loans which should kick into high gear for resets over the next 12 months--this should begin another wave of foreclosures.

Should you buy now or should you wait?  My answer (as to everything) is: it depends.  You have to factor in a few variables: how long will you keep the house?  Will you live there or rent it? Take a look at these two examples:

1) Buy a house today at $150,000 at today's rate of 5.25% 30-year fixed (5.571 APR).  Your PI payment (that is, the payment for just your loan aka Principal + Interest) with 20% down is $663 and your loan amount is $120,000.

2) IF rates go to 10%, the same $663 per month gets you a loan of only $75,508 (10.617 APR).  That home value had better drop an additional $45,000 over and above however far it has already dropped, or else YOU CAN'T AFFORD THIS HOME ANYMORE.

Scenario 2 assumes prices continue to drop (which could happen).  It seems equally likely that we are currently near the bottom in this one area and will stay here a while.  Eventually people should begin investing in real estate again as they see the Inflation hit.

Could rates go to 10%?  For anyone over 30, you may remember when mortgage rates hit 22%!!  This was a DIRECT RESULT of the Inflationary 1960s and 1970s.

The money supply of our nation is larger than ever before.  The Deficit is $1.38 Trillion so far this year--an the year isn't over.  The dollar has resumed its long decline against the other currencies of the world.  The Federal Reserve has been spending Billions by directly buying Mortgage-Backed Securities in order to jam interest down to below-market levels.

All this tells me that the question should not be "if" rates will go above 10%, but "when" and "how high"?

I think locking in current interest rates is a boon, especially for anyone who is currently renting.  Investors may also wish to diversify back into real estate: current rates are favorable for them too.