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May 12, 1995
Thirty-year mortgage rates at "zero and zero" fell to 7.875% for about an hour Wednesday morning before rapidly rebounding to 8.25%-8.375% territory by week's end.
Late-week turnarounds like this create special misery. The two surveyors of national mortgage rates, Freddie Mac and HSH Associates, conduct their surveys on Monday and Tuesday for publication the following weekend. They also assume that all mortgage borrowers spend two points to buy down their rates. This weekend, all major media will be trumpeting "Mortgage rates fall to sevens!!!", completely missing the turn.
Monday's clients will be alarmed at the loss of phantom riches, and suspicious of mortgage gouging. It's amazing that people trust Sam Donaldson's mortgage quotes more than ours, but they do.
The rebound in rates is mostly a natural phenomenon without "cause": any violent action begets reaction. Some of the continuing rise in rates today came from nervous-making inflation reports (April wholesale prices up .5%, CPI up .4%), but these are not a major worry. Inflation is a lagging indicator, tending to peak a few months after the economy has finished an expansion phase and begun to weaken.
More interesting are the causes of the dramatic fall in rates. The softening economy is the main reason, but the prospect of a balanced Federal budget is having a salutary effect on financial markets.
It is not an accident that the dollar fell to all-time lows a few days after the defeat of the balanced budget amendment. Nor is it an accident that the dollar is up almost 10% against the yen since the Republicans announced their balancing plans. Neither is it an accident that the biggest part of the interest rate drop followed that same announcement.
It looks like the Republican deal will pass this Fall. Their budget calls for reducing the rate of future spending growth, not spending "cuts", as the Democrats would have you believe. Example: the Medicare and Medicaid "cuts" are reductions in the future rate of annual growth from 10% and 7% to 7% and 5%, respectively -- still roughly double the inflation rate.
The Democrats used to have a defense against spending cuts: defense. In the 1980's, the Republicans always wanted to cut social spending and raise defense spending, and Democratic opposition to the trade led to a decade of gridlock. Now the two parties are in defense agreement: no increases, not even for inflation.
Pro-spending Democrats will soon be left defenseless, only in favor of tax increases, or a perpetual deficit. Oh, there is one Democratic hope: the boundless capacity for Republican self-destruction.
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