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July 10, 1992
Mortgage rates are holding at their lows of the year, and show many signs of going lower.
What little economic data were released this week confirmed negligible inflation: the Producer Price Index rose .2% in June, while the "core" rate fell .1%. In another long range inflation indicator, the various measures of the money supply continued a very weak performance.
Interest rates are so low that it's hard to find comparisons within the lifetime of many borrowers. A 3.00% Discount Rate was last in place two years before the birth of today's 27 yearold first time home buyer.
Current mortgage rates are new lows for the '90's, and lower than any time in the '80's. Only the 197374 recession produced lower rates than these about the time today's middleaged moveup buyers graduated from college.
If I'm buying now, what do I do? Do I lock in on the birdinthehand theory, or wait for something lower?
Here is a long term perspective on the potential for even lower mortgage rates: the last time the Fed took the Discount rate to 3.00%, the VA mortgage rate was 5.25%. (We have to use the VA for comparison because outfits like Freddie Mac hadn't been born yet, either.)
There is the anomaly: short rates are at levels appropriate for zero inflation or a depression, while long term rates hold high.
Short term rates like the Discount rate are so far down that farther down doesn't have much meaning. By the same theory, the Fed is so easy that an easier Fed is redundant.
There is near unanimity in the financial markets that the Fed has shot its bolt, and still the economy will not respond. There is more agreement: finance types do not believe there is a short term prescrpition of any kind which will restore economic vigor.
This belief in intractable economic weakness can crack long term rates.
For those who wish to roll the bones into August and September, we have a couple of guesses about how this drama will play out. Despite the dangers of unanimity, we agree that long rates are likely to drop in the months ahead.
However, the next three weeks will be tough on those floating rates. The next big Treasury borrowing is in the first week of August (along with the next employment data). Rates are likely to rise before the borrowing, starting maybe next week, and not resume a decline until the borrowing is over.
If we get profoundly lower rates, it won't happen in a straight line.
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