Mortgage Rates: A Mind of Their Own

In a move that's a departure from history, mortgage interest rates seem to be moving independently rather than in tandem with cuts of other influential lending rates by the Fed.

When the Fed chopped rates in January, the real estate community was jubilant, and rightly so. By making it easier for banks to borrow money and lend it to one another, the Fed's move was meant to stimulate a stagnant housing market, send Americans on a shopping spree, and curb fears of a looming recession.

Usually, when the Fed funds rate and the discount rate go south, so do mortgage rates. But lately, rates have shown signs of behaving erratically, with typical mortgage rates being somewhat unfazed by the Fed. Just as the weather has been behaving strangely this winter-perhaps because of global warming-the climate for mortgage rates has also confounded some experts, thanks to a heating-up of inflation. The problem, it seems, is that despite the best efforts of the government to curb inflation while staving off a recession, prices are climbing steadily on everything from heating oil to imported widgets. If bond markets anticipate inflation, demand will typically drive up long-term interest rates; and it's those long-range rates that have the most significant and directly corresponding influence upon residential mortgage rates.

Two colossal mortgage problems

What all this means for most Americans is that they have two colossal problems on their hands at the same time. The one getting the most attention is the very real prospect of a full-blown and definitive recession. Anyone with working knowledge of the real estate and mortgage markets can confirm that those sectors have been in a recession for months, but the rest of the economy has thus far been able to avoid such a slowdown. Technically speaking, the United States economy will not be in an official recession until the nation's number crunchers confirm two consecutive quarters-or half a year's worth-of negative growth. One quarter has already made it into the books, and many expect that the next quarterly report will validate our recession fears once and for all.

Fear of inflation

Then there's the pesky problem of inflation, which won't go away. Wholesale prices in late February spiked, which is a troublesome signal. The likelihood is increasing that a gallon of gasoline, for instance, will cost four dollars by this summer. Inflation is quietly creeping up on us and threatening to steal the limelight-and the business headlines-away from the apparently imminent recession. If inflation spikes, so will mortgage rates.

At least for now, there's no great cause for concern. You can still find a mortgage-or refinance an existing one-with a cheap 30-year fixed rate. The Fed is expected to cut rates again, which can only help. But if inflation hits in the midst of a recession, the party will be over for mortgage rates, and three-dollar gas will look like a steal.