Mortgage Interest Rates Predictions - Negative Real Interest Rates

Posted by joanne on March 28th, 2009 at 10:01am

Mortgage rates predictions have been breaking new ground this past year, with negative real interest rates now a fact of life in the US. Home mortgage rates predictions remain low, as the government struggles to prevent a full-scale collapse of the US economy.

While most home mortgage interest rates predictions will be made in terms of nominal interest rates, the real interest rate is the interest rate of real interest to economic observers. Nominal interest rates are the mortgage interest rates quoted by banks and other lenders - the percentage rate per annum which you will pay the lender as interest. Real interest rates are the nominal interest rates less the rate of inflation.

Why does an academic exercise like calculating real interest rates matter for mortgage rates predictions?

The answer is simple - home mortgage rates predictions will take into account tensions between the current real interest rate and the normal, or sustainable real interest rate. If the real interest rate is below normal, mortgage rates predictions will trend upward. If the real interest rate is noticeably above normal, mortgage rates predictions will trend downward. Economic pressures work to pull real interest rates back into the normal range, eventually.

What has confused mortgage rates predictions lately is that the government has been manipulating the money markets to hold real interest rates well below normal. In fact, real interest rates are currently negative. That is, when banks lend you money, the amount you repay is not even enough to cover the loss of value due to inflation. Home mortgage rates predictions would be that banks can’t sustain those kinds of losses forever, and therefore, mortgage rates must rise.

Real interest rates are likely to remain negative for a while yet, which means that mortgage interest rate predictions are still looking at historically low nominal interest rates.

As a home owner, you need to stay alert during this crisis. The Chinese character for “crisis” is a combination or the characters for “danger” and “opportunity”, and that is indeed the situation for home owners in the US today. The decisions you make now will determine whether you suffer or profit from the global economic crisis. Mortgage rates predictions are telling us that now is the best time to secure a 30 year mortgage at an all-time bargain rate of interest. Rates must rise at some point in the next couple of years, and you don’t want to be caught out when they do.

You won’t get to live in the luxurious world of negative real interest rates forever. Mortgage rates predictions will have to rise eventually. Make sure your budget can stand it when they do.

Under Finance