Sellers Crying Wolf As Mortgage Rates Threaten to Rise

Sellers are finally relenting and getting realistic about pricing, so it's definitely a buyer's market. But mortgage rates may soon rise to help the nation fight off inflation. Buy now before it's too late to enjoy the best of both worlds.

Home prices are down, homeowners are slashing their asking prices, and interest rates are still near their all-time lows. Inventories are vast, selections are great, builders are adding valuable incentives, and money is cheap. The only real problem is that money may be much too cheap.

Who's to blame?

Everyone sat up and took notice of the deteriorating economy when gas prices surged. Most blame oil companies, some blame the White House and its lack of a consumer-oriented energy policy, a few blame auto manufacturers, but hardly anyone blames one of the main undeniable and indisputable culprits-a sadly weakened American dollar.

Despite strong lobbying within the international oil industry to start pricing oil in euros, most of this precious resource is still priced in dollars. When the greenback gets weaker, it doesn't buy as much. Less than 10 years ago, for example, a buck and a half would buy a gallon of gas. Now, twice that many dollars won't buy a gallon. Part of the reason is that the dollar, worth 100 pennies in 2000, is only worth about 50 or 60 cents today. As long as the currency slides, it takes more of them to buy commodities, causing inflation to continue.

Understanding the weak dollar

One reason that the dollar is weak is that interest rates are low. You can earn a lot less these days by investing in a account">savings account or certificate of deposit than you could three years ago. So the really big spenders, like international banks, governments, and sovereign kingdoms in the Middle East, would be crazy to invest in the U.S. when they can put their money into other countries, which offer substantially higher rates of return. Global money goes where rates are high and pumps up other currencies as it siphons value away from the weaker economies, like the U.S., thereby deflating our buying power.

Stronger dollar, higher mortgage rates

If the Fed raises interest rates, the dollar will get stronger. Oil will get cheaper. Gas prices will fall. Airlines might even let you check your luggage without charging you for it. But it will be harder to find low-interest mortgage rates; as mortgage rates rise, it becomes harder to buy a home. As the dollar gets back into shape, the economy will likely experience a painful recession.

The last time the U.S. was in this kind of mess was after the Vietnam War. The discount rate was raised about 10 points, mortgage rates soared to 25 percent or more, and that tamed the ugly inflation. The moral of the story is that if you're planning to take out a mortgage and buy property, now is the right time to do it while interest rates and real estate are a double-barreled bargain.