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
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.