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30 Year Fixed Rate Mortgage Rate
As of the end of September, the 30 year fixed rate mortgage rate has been hovering around 5.2%. By historical standards this rate is very low and would reflect a deflationary environment. So, the question arises, “Will these rates continue to stay low? Or, is this a temporary aberration?” Many contests are debating this question as we speak.
In looking at the performance of US treasury bonds in the last six months, we see the beginnings of a reversal in mortgage rates. The 10 year U.S. Treasury bond’s yield has gone up by roughly 50% since the beginning of 2009. However mortgage rates have remained essentially flat during this time. Why is this, the case? Much of it has to do with the actions of the Federal Reserve Bank of the United States. In game store claim unprecedented move, the Federal Reserve has injected billions of dollars of liquidity into the United States economy. These injections have taken many forms but have included direct increases in the Federal Reserve's balance sheet. The balance sheet represents the amount of money that has been printed and is in circulation. The greater the money supply increases, the greater risk of inflation to the US economy 6 to 12 months into the future.
By increasing the money supply by over 100% in the last 12 months, the Federal Reserve has embarked on an historical gamble. They are betting that they can print just enough money to counter deflationary tendencies while preventing inflation from taking hold. If history is any indication of future performance, the United States economy is in for a difficult spell in the next 1 to 3 years.
The reason being is that timing such massive liquidity injections into the market combined with calculating the correct amounts of liquidity needed is nearly an impossible task. Every time the Federal Reserve has done such artificial implementations, they have either delayed in removing the liquidity quickly enough (resulting in rampant inflation) or have not added sufficient liquidity quickly enough (resulting in rampant deflation). The most recent net result was what the US economy experienced in the 1970s, better known as stagflation. During this period of time, the US inflation rate went from practically zero at the beginning of the decade to almost 18% by the end of the decade.
Getting back to the original premise, should the average US consumer jump in and take advantage of the current 30 year fixed rate mortgage rate or hold out for something better? If history is our indicator, being greedy and hoping to catch 30 year fixed rate mortgage rates at their absolute minimum is a fool’s game at best. At worst, it can lead to tens of thousands of dollars of lost opportunity cost.
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