Mortgage Rates Predictions

Making mortgage interest rates predictions is like making weather predictions - it is impossible to be precisely accurate with mortgage interest rates predictions, and the further in advance you try to predict mortgage interest rates, the greater the margin of error in the prediction.

On the other hand, even mathematically chaotic systems are predictable in broad terms.

If you think about the weather, you may not be able to predict the top temperature for a given day in July, but you can reasonably sure it will be within a certain range - say, if you live in Miami, between 80 and 95 degrees F, and if you live in Stockholm, between 16 and 25 degrees C.

Just as climate gives a broad indicator of summer top temperatures, economic climate gives a broad indicator of mortgage interest rates. Just as we can make moderately reliable weather predictions, we can make moderately reliable mortgage rates predictions.

Factors Which Make Mortgage Rates Predictions Rise: Inflation

So called "real interest rates" are calculated assuming that inflation is zero. To get from the "real interest rate" to the "nominal interest rate", which is what your bank will charge you for your mortgage, you add on the annualised percentage rate of inflation, so mortgage rates predictions will increase as inflation increases.

If nothing changes whatsoever in the housing market, but something changes elsewhere to create inflation (like, for example, oil prices increase, raising the prices of gas at the pump, heating oil, and anything transported by road), then there will be upward pressure on interest rates, and mortgage rates predictions would have to take that upward pressure into account.

Factors Which Make Mortgage Rates Predictions Rise: Reduced Availability Of Credit

Financial markets operate on supply and demand. Mortgage lenders generally borrow the money they lend for mortgages, or at least 90% of it. Mortgage rates predictions must take into account whether the supply of money is increasing or decreasing.

Factors Which Make Mortgage Rates Predictions Rise: Increased Risk

Apart from the market pricing factors, there is another factor which comes into play in any investment decision - risk. Mortgage rates in general will depend on the overall risk involved in the housing market.

In terms of mortgage rates predictions, the key factor is the likelihood of default by home owners, and the bank's chance of getting their money back if a default occurs. The underlying driver of this likelihood is the LVR, or loan to value ratio. This is the average mortgage balance divided by the average house value. Mortgage rates predictions will be influenced my movements in house valuations.

If house values plummet, as they have in some parts of the US, then the default risk for the banks suddenly increases, which means that they will be wanting to charge higher mortgage interest rates; predictions will take this upward pressure into account.

Factors Which Make Mortgage Rates Predictions Fall: Government Intervention

The US Government is an 800-pound gorilla in the financial markets. By issuing Treasury bonds at different interest rates, the government can influence the overall market for money, and thus affect the "real" interest rate. Mortgage rates predictions will consider Federal actions in the markets.

Mortgage rates predictions need to take into account the political imperatives as well as the purely economic influences on interest rates. Voters are particularly sensitive to losing their homes in large numbers, and the government is keen to avoid the scenario in which interest rates go up, and more homes are foreclosed, only to be sold into a plummeting market, further worsening the oversupply problem in residential housing.

Everyone - the government, the banks, and the home owners - are in agreement that this is an outcome to be avoided. Mortgage rates predictions based on purely economic considerations might indicate that mortgage interest rates are due to rise, but while the political pressure is running high, and in an election year, the government will do everything in its power, however economically irresponsible in the long term, to push the interest rate rises off until after the November elections. Mortgage rates predictions must take this political distortion of the financial markets into account.

Mortgage rates predictions are more complicated than weather predictions, because political factors influence mortgage rates predictions. This doesn't make accurate mortgage rates predictions impossible, of course, but it requires more than just a mathematical model to make accurate mortgage rates predictions - it takes a good political "nose" as well!

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