Higher mortgage rates after Standard & Poor's downgrade?
August 10, 2011
Will mortgage quotes rise as a result of a lower credit rating for U.S. debt?
That's a question which now confronts the country, entering new territory with the historic decision by Standard & Poor's to reduce the national credit standing from AAA to AA+.
The potential for higher costs, including current mortgage rates that could rise, is clear. As the Huffington Post explains, "One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities."
The catch is that we really don't know what will happen. While there is a very good argument for rising rates--the business above about Treasury securities--there are also arguments which suggest that rates will remain placid.
Realities
The first point to be made about U.S. securities is very simple: The government has not defaulted on a single bond, note or bill. Not one. No investor has a lost a dime.
The second point is that we live in a very iffy world. There are a lot of places where you can get more interest than in the U.S., but where there are real concerns regarding safety in terms of the investment, the stability of the local government and the ability to walk down the street without an armed guard.
The third point is that mortgage rates today are near historic lows. It's remarkable that they're not higher. Worrying about whether the best mortgage rates are 4.4 percent or 4.65 percent is not much of a concern when you consider that for years on end rates have been at 7 percent, 8 percent and higher--much higher. Just look at the HSH mortgage rates for 1983. Anyone up for mortgages above 12 percent?
There is, however, a seriousness to the Standard & Poor's downgrade which cannot be ignored. We have gone from four surpluses in a row under President Clinton to massive annual deficits.
Looking Ahead
The real issue that needs to be confronted is where we go from here. The last-minute deficit accord will produce a bigger debt and no additional taxes. This means our next debate will be about, well, the very same issues we just put off with the last debate.
The reality is that our current budget problems will not be resolved before January 2013. That's when a new Congress will take office and with it a mandate to change the climate in Washington. Unfortunately, our national debt may well be downgraded at least once more before then, assuming nothing much happens in Washington to change today's financial policies.
Unfortunately, the assumption of a policy standstill is very likely--and not helpful.
