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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, March 2, 2008 Why are mortgage rates rising? Inflation fears By Steve Tytler Question: We have been waiting for mortgage interest rates to drop so that we can refinance, but every time we check the rates they keep going up. This doesn't make sense. The Federal Reserve cut interest rates in January, but mortgage rates have been going up instead of down. We keep hearing that the economy is going into recession, which should cause interest rates to go down, but they keep going up. Why is this happening? C.B., Everett Answer: I can give you a very short answer: Fear of inflation. As you point out in your letter, the economy is slowing down. According to government statistics for the fourth quarter of 2007, the national economy grew at its slowest pace since 2002. We are not in a "recession" yet -- which is technically two consecutive quarters, six months, of negative economic growth -- but some economists think we are heading in that direction. Usually, a recession is "good news" for the mortgage business because interest rates typically drop as the Federal Reserve tries to "prime the pump" to get the economy rolling again. But this time, Fed rate cuts are not likely to help mortgage rates, because investors don't want to get locked into long-term investments (like mortgage certificates) with low interest rates in a high inflation rate environment. The national inflation rate is now at its highest rate since the "bad old days" of the early 1980s. The price of gold is going through the roof, which means many investors expect inflation to get worse. That's bad news for home buyers and homeowners hoping for lower mortgage rates. Mortgage rates made a very brief dip in January after the first Fed rate cut, but since then, mortgage rates have increased a full percentage point. For example, you could have locked in a 5.25 percent, 30-year fixed rate mortgage immediately after the first Fed rate cut. Today, you would get about a 6.25 percent, 30-year fixed rate loan for the same fees. In fact, mortgage rates are currently higher now than they were before the first Fed rate cut in mid-January. Normally, mortgage rates drop in a slowing economy, but because of the increasing fears of inflation, mortgage rates are likely to trend upward for the remainder of this year. I don't usually like to make mortgage rate predictions because there are so many different financial and economic factors that affect the rates, but in this case, I would lean toward "locking in" if and when there is another dip in mortgage rates because all signs point to higher rates this year. Mail questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail to economy@heraldnet.com.

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