Tuesday, February 17, 2009

President Obama will officially sign into law one of the largest pieces of legislation in American history at approximately 1:00 p.m. Mountain Standard Time. (The signing ceremony will be conducted in Denver, Colorado - the place Mr. Obama officially accepted his party's presidential nomination.) The economic stimulus package, a $787 billion assortment of tax breaks and government spending, is designed to re-ignite the engines of economic growth in the United States.

While the impact may not be immediate, this event will likely mark the beginning of the end of the dramatic move to lower mortgage interest rates that began in August of last year. I am not suggesting that mortgage interest rates will soon begin touching double digit levels - but I do want you to be aware that the prospects of a 4.50% 30-year fixed-rate mortgage is rapidly fading from sight.

Consider the following two scenarios: 1) If the Obama administration's stimulus package works as advertised economic growth will begin to accelerate sooner rather than later, driving up the demand for capital -- which in-turn will push-up interest rates of every description (including mortgage interest rates). 2) On the other hand, should the package fall woefully short of providing the necessary financial stimulus to grease the gears of the economy the government will be forced to borrow more money - or print more money - or create some kind of blend of these two revenue generating activities. In any case - returning to the credit markets to borrow massive amounts of additional capital (beyond the gargantuan sums already outstanding) and/or simply printing up enormous piles of new dollars will do nothing but put more upward pressure on mortgage interest rates.

As in the case with prospective homeowners - there is a limit to the amount of outstanding debt they can have in place beyond which lenders will either demand significantly higher interest rates because of the increased risk of default - or if the lender deems the risk of default to be too large -- the loan request will simply be rejected. While Uncle Sam currently enjoys a reputation as the most creditworthy governmental borrower in the world - there is a point where his sovereign credit score will begin to degenerate significantly and with it his ability to easily access relatively cheap amounts of capital.

Should the government chose to simply print cash instead -- each dollar that runs off of the government printing presses will directly reduce the value of each dollar you have in your billfold or purse. As this erosion of the value of the dollar continues suppliers of goods and servicers will find it necessary to increase their prices to offset the declining purchasing power of each dollar in revenue they generate. As you probably already know, Superman lost all his strength when exposed to kryptonite, and so it is with mortgage investors when they are exposed to rising levels of inflation. As inflation pressures rise -- so do mortgage interest rates.

As I mentioned earlier in this commentary I am not suggesting mortgage interest rates will soon begin touching double digit levels - but I do want you to be aware the prospects for a conforming 4.50% 30-year fixed-rate mortgage being a common sight on investor rate sheets is rapidly fading from the realm of realistic expectations