Y2K Bug Brings Lower Mortgage Rates?

The Y2K computer bug has been blamed for lots of things but not cheaper mortgages--not until the National Association of Realtors' chief economist recently said to expect mortgage interest rates to take a dive. Rates will make a "dramatic decline," says James F. Smith, dropping to between 6 to 6.5 percent for 30-year fixed from the current 7.6 percent level, and adjustable rates to around 5 percent. Homeowners could save big bucks on refinancing and buyers could reap the benefits on home purchase loans. What's going to cause the decline, according to Smith? A major influx of foreign capital from foreign investors seeking safe haven in the U.S. from the Y2K computer glitch.

Although things are looking reasonably good from a Year 2000 perspective here in the U.S., many other nations including Western European countries and Russia are sweating the possibility of major financial computer glitches. That's bad for foreign investors who put funds into those financial markets but it's good for U.S. capital, it turns out. Those investors are going to pull their money out of error-prone foreign investments and place it temporarily in safer U.S. treasury bonds. Mortgages are tied to treasuries, among other things, and all that additional money is going to drive interest rates down. Voila, lower interest rates here for your home loan or refinance.

How long will it last? Rates should start dropping over the remaining months in 1999, and continue into January, 2000 when investors start returning their funds overseas. During that time, homeowners and homebuyers will have a window to obtain financing before rates go up again, says Smith. But the picture won't remain rosy. He also predicted at the Realtor's national meeting that rates will climb back into the high 7 percent range next year, almost to the 8 percent "line of death" range where consumers might say, "I can't afford a house."

The overall economic picture, according to Smith is going to be good next year. But Smith couldn't resist predicting what many economists had predicted years ago--a recession. It will start by late 2002, he says, but will end by around February 2003. Rock bottom mortgage rates of around 5 percent will cause the economy to rebound again in 2003, the NAR official said.

If you're a homebuyer discouraged by the tight real estate market, you can take solace in Smith's story. 14 years ago, Smith and his family moved from Chicago to New York State. They chose the suburb of Scarsdale because of its good schools. After chatting with a real estate about their wish list for a home, the agent said, "Well, shall we go see the house?" Smith was impressed: "You mean after this short conversation you know exactly what sort of house we're looking for?" The agent responded: "Oh, no. It's just that there's only one house for sale in all of Scarsdale, and this is it." The Smiths eventually bought a home in Fairfield, Connecticut, instead.