What Will Interest Rates Do in 2008?

A reader asks:

I want to know about mortgage rates. I assume in a recession they go down and in an inflation they go up. Clearly our deficits point to a big inflation when we have to keep borrowing money. Yet, everyone says we are heading into a recession. I have to refinance in the next nine months. Should I jump in now or wait for lower rates?

For personal financial advice, please see a mortgage professional. If you want a definite rate forecast, go to the Mortgage Bankers Association website to see what they are forecasting. They are forecasting a 30-year fixed rate to drop from 6.2% to around 5.9-6% through 2008. (MBA website, Economic Outlook and Forecasts)

Here's how to evaluate the information so you can determine what you think rates will do:

Fixed rate mortgages typically follow the 10-year Treasury note and 30-year Treasury bond yields. In a recession, investors buy bonds, so these rates decline. During inflation, investors need more return, so they don't buy these bonds, and rates go up. However, the large U.S. current account deficit is forcing the dollar to decline, which caused investors to slowly move away from U.S. Treasuries this summer. Recent volatility in the stock markets have caused investors to flock to safety, which has caused Treasury yields to fall to 4.45%. (Source: U.S. Treasury Daily Treasury Yield Curve Rates)

Variable rates, interest-only, and adjustable rate mortgages typically follow the LIBOR rate, which usually follows the Fed Funds rate and the short-term Treasury yield rate. However, in recent months these rates have disconnected from each other. The Banking Liquidity Crisis caused the LIBOR to rise well above the short-term Treasury and Fed Funds rate. The Fed's recent actions have returned LIBOR to normal, for now, and so adjustable rates are again lower than 30-year fixed mortgage rates. (See What Is Libor, Why It Is High, and How It Affects You)

However, these rates could be somewhat turbulent in the first half of 2008, until the banks begin to trust each other and LIBOR returns to normal. According to Elizabeth Weintraub, About.com's Guide to Homebuying, many borrowers are refinancing with fixed-rate mortgages just to protect themselves from potential interest rate volatility. (Source: 2008 Real Estate Predictions)

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