Well, the unthinkable has happened! The United States’ credit rating has been downgraded for the first time in its 70-year rating history. The stock market was severely punished for it. The Dow has seen two days of -500 or more points in the last week without bottoming out. What we thought was a correction now appears to be a general market sell off.
But how will all this affect mortgage rates? So far, it’s actually been great for the rates. We are right near our all-time lows again. Generally speaking, mortgage rates will follow the bond market. When people get out of stocks, they typically move in leaps and bounds to park their money. When more people buy bonds, the yields on the bonds go down and therefore we have lower interest rates. This is how it usually works.
However, the problem is that this is not an ordinary liquidation. The reason the stock market crashed is because of a loss of confidence in the United States’ ability to never default. A US debt default would have been unthinkable years ago, but we JUST saw it happen last week. So investors are scared, but ironically they are still buying US Treasuries anyway. Why? Probably because there is nowhere else to go. The euro is just as bad, if not worse, than the dollar, and the dollar remains the world’s reserve currency. On top of that, investors saw the government come to the rescue moments before the default and that probably restored people’s confidence that they would never actually default (although this was a very close call).
However, how long can these conditions last? Probably not much more. Eventually, rates will have to go up. Right now, rates are so low that investors aren’t really earning anything, let alone enough to keep up with inflation. People are literally buying US debt because there is nothing else to buy that seems safe to them. But remember, rates are artificially low right now and can’t stay that way forever. Eventually, the market will demand higher rates on our debt, and when it does, BEWARE! Higher rates will mean the US will have to print even more money to service its debt, which will mean more and more debt ceiling problems and more loss of confidence in the dollar and Treasuries.
However, until that happens, you can also save some money by refinancing or buying a home now at the lowest mortgage rates ever.
