With the short week last week, it was a relatively quiet news week. Wednesday saw a “cornucopia” of economic news released to little fanfare, as attention remains fixed on the fiscal cliff negotiation. We have written a holistic guide to the fiscal cliff, including background information and its possible effect on real estate and mortgage rates. You can read the entire article HERE.
For our column here, we will republish the section on mortgage rates. To stay informed on the economy, real estate, and mortgage rates as the fiscal cliff approaches, make sure check in with our website for daily updates, or tune into our radio show Mortgage Matters on KVEC 920 every Saturday morning from 10 a.m. to 12 noon.
How will the fiscal cliff affect Mortgage Rates?
Typically during a down market, mortgage rates fall. This time, says Central Coast Lending owner Jason Grote, we may be around the lowest levels we will get.
“I don’t think that rates will move in the short term as we near the cliff. The market is very good at anticipating and pricing in expectations, and I have to believe that either way we are already padded for the outcome.”
We have seen some small improvements since the headlines shifted focus from the November 6 election to the fiscal cliff. You can follow along on our Mortgage Rate Tracker, but here are the three noteworthy improvements:
- 30-year fixed, 3.250 percent rate: has dropped about 0.030 percent in price, which is 3/8 of a point.
- 30-year high balance, 3.375 percent rate: has dropped just 1/8 of a point in price.
- 30-year USDA, 3.250 percent rate: has dropped 3/8 of a point in price.
The 15-year fixed, Jumbo, VA, and FHA programs have remained mostly unchanged.
A plunge over the fiscal cliff would likely cause rates to fall even further – breaking significantly through already record-low rates.
“If we go over the cliff, rates would have to fall,” said Grote. ”The impact to GPD and overall impact to the economy will be a sharp decline. This will mean once again that bond yields will experience downward pressure as investors make the familiar flight to quality.”
“In the event that bipartisan agreement is reached I think that we will see rates increase a bit,” said Grote.
Goldman Sachs said that it expected the S&P 500 to fall about 8 percent in the lead up to the fiscal cliff, but if the dilemma is resolved, it sees the potential for significant strength in equities. The note said that it could see the S&P 500 recovering for a 16 rise from current levels by the end of 2013. Grote agrees with the analysis.
“The compromise would be a demonstration of great bipartisan cooperation and give a breath of hope to the international investment community, this means a real bright future and strong growth potential for America’s economy. That renewed hope would certainly drive the stock market up and a corresponding upward pressure on interest rates.”
Last time the U.S. government dealt with federal debt, it primarily kicked the can down the road, which is partially why we are dealing with the Fiscal Cliff dilemma today. For the economy to show any lasting strength, it will be necessary to create a lasting blueprint for success.
“I think the key here is the whether the solution is watered down and another short term band aid or if it’s a sounds plan with lasting benefit,” said Grote. “The more watered down, the less impact we should expect in general.”