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Gridlock Nostalgia
All the new home construction in Boulder County means a lot more people than usual are nervous about the level of mortgage rates in, say, August.
If the builder has not yet broken mud, September may be the magic month. Of course, for the unlucky (Is it my fault the plumbing subcontractor promised to do 73 houses in one month?), completion could be October. Or, worst case, you can always have Thanksgiving dinner at somebody else's house.
Long term interest rate commitments are not a solution if nobody knows for sure when the house will be done.
So, where are interest rates headed, and how worried should I be? Some history, a little scenario mongering, and a philosophical position should help.
The main problem with mortgage rates this summer is that there is no more gridlock in Congress.
Pardon? We thought gridlock was the problem.
You read it right. Gridlock, like the Cold War, no matter how unpleasant, had the benefit of predictability. In the last dozen years in the finical markets, nobody believed the deficit would do anything except widen. Periodic deficit solutions offered by either party were the primary source of hoohawing black humor among traders.
You knew for a certainty that some pinstriped Republican would advocate a strong defense, decry the effects of taxes, and demand spending cuts from a corner of the budget too small to buy a day's worth of gas for an F-15.
On alternate days, a Democrat who never quite got over the Sixties would demand cuts in defense bloat, higher taxes (preferably on the rich, but acceptable from anyone who could be cornered into paying), and lots more money for schools, cities, poor people, middle class people, old people, minority people, farm people, healthy people, and sick people.
The financial consequence of these ludicrous exchanges was a dozen years of tightfisted Federal Reserve. Not only was the Fed trying to keep monstrous deficit spending from turning into inflation, but was squeezing out the last, leftover inflation from the 70's.
Result: an economy grinding slower and slower, and a particularly poor job market (creating a bad job market is the only way to remove inflation).
Twin result: steadily falling interest rates ever since the summer of 1982.
Through all those years, the Republicans were no closer to sensible economic policy than were the Democrats -- with one exception: the Republicans backed the Fed.
Ronald Reagan backed the Fed because he liked the sound of "The dollar standing tall" and "hard money," though many suspect he had no idea what either line meant.
Today's extremely low inflation, generation-low mortgage rates, and Bill Clinton's election are all three due to George Bush's backing of Alan Greenspan's inflation war.
Preliminary reviews of Bill Clinton are good. His is the basic tax and spend Democratic prescription, but there is a real deficit cut included.
However, the Great Changer has not yet had to make a choice between economic growth and Federal Reserve desire to prevent inflation.
The economy is so slow, particularly in wages and job growth, that a spike in rates back to nine percent is most unlikely this summer. Mortgages are likely to stay under eight percent, and the odds continue to favor new lows.
However. (You knew there wouldn't be a straight answer.) Someday, the economy is going to pick up. Interest rates are so low that the economy may pick up all of a sudden (essentially nobody expects that to happen this summer, which makes it more likely).
At the same moment that Bill Clinton is making the speech taking credit for the turn in the economy, the Fed will be figuring out how soon and how much to tighten.
Shortly after sitting down, Mr. Clinton will have to decide whether to back the inflation fighters, even if they intend to limit the strength of the Clinton Recovery.
The time to worry, to buy long term money, to plumb the house yourself, is at the slightest whiff that Slick Willie is trying to jawbone the Fed into easy money.
Oh, yeah, the philosophy. If you had built a house any time since 1972, you would get a rate worse than you get now. Worse things can happen to you than it turns out to be a 1974 rate.
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