Was This Much Ado About Nothing?

Political wrangling on the federal debt ceiling and the Affordable Care Act (Obamacare) helped to hold mortgage rates in check for another week.

Bankrate.com's national survey reports an average rate of 4.39% on the 30-year fixed-rate mortgage. Freddie Mac's survey shows the national average rate at 4.23% on the same loan, which is roughly where it was last week.

Rates have been held at these levels on raised financial market risk. Many market participants are concerned the government slowdown will lead to slower economic growth. The rationale being that furloughed government workers would spend less, and thus the economy would slow.

At the same time, more investors are fearful the government will default on its debt. Most financial institutions and many individuals own U.S. Treasury notes and bonds (either directly or through a mutual fund). These securities are perceived as ultra-safe investments. A default would negate that perception and investors would sell en masse, thus generating huge financial losses.

The fears, quite frankly, are over done. The economy is powered as much by investing and savings as by consumption. To be sure, everything produced is made to consume, but there are vast production stages that generate paychecks and spending that go unnoticed in economic-growth statistics. In short, the furlough workers and the reduced government activity itself isn't having as much of an impact as many believe.

That said, private companies that require government approval to transact business are being hurt – mortgage lenders are one – and that could lead to slower economic growth.

As for defaulting on the natural debt, that's also very unlikely. The federal government brings in roughly $253 billion a month in revenue. Interest on the national debt is around $20 billion, or less than 8% of monthly income. There is plenty of revenue flowing in to pay creditors, as well as to pay people owed money through Social Security and government pensions.

For now, mortgage rates are at levels unseen since mid-June. When the latest political brouhaha began a few weeks ago, we opined that the rate on the 30-year loan would fall within a 4.25%-to-4.50% range. So far, we've been on target.

We seriously doubt rates will go any lower. More likely, they will move higher: Fears of a default have abated and a deal appears imminent on the debt ceiling that will have the government up-and-running in full soon.

In fact, the yield on the 10-year Treasury note is already up over 10-basis points this week. As the 10-year Treasury note goes, so, too, goes the 30-year fixed-rate mortgage.

Yields are moving up despite the high likelihood that the current Federal Reserve Chairman Ben Bernanke will be be replaced by lead candidate Janet Yellen. Ms Yellen supports continuing the quantitative easing and low-rate interest policies currently in place. Nevertheless, rates are still moving higher.

We believe we are at a bottom in interest rates, which means we see little reason to wait to apply for a mortgage. Admittedly, there are delays in dealing with the federal government to verify borrower information, but it's still worthwhile to get the process started nonetheless.

Courtesy of Jessica Regan.

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