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Deal or No Deal: Home Interest Rates Possibilities

July 18, 2011 by Kevinmiller
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Without getting into politics, let’s take a look at how the success or failure of the debt ceiling negotiations these next couple weeks could affect the Dallas housing market. For better or for worse, what happens in Washington effects everyone — especially, as we detailed a few weeks ago, when it comes to Texas home interest rates.

Here’s how three potential scenarios could effect the landscape here in Texas:

1. Deal!

Currently, Texas is witnessing a prolonged buyer-friendly market. Unsold inventories are high, keeping prices low. Land is abundant. Texas home interest rates are firmly anchored to the rock bottom. For folks in position to buy, there truly never has been a much better time to buy (no cliche). And here at Texas Lending, we offer some of the lowest rates for Texas home purchase loan, Texas home refinance loans, and Texas home equity loans in the state.

Naturally, if a debt-ceiling/reduction deal is passed, this favorable homebuying environment should last a while longer.

Over the long-term, interest rates will eventually need to rise. And depending on how successful the deal is at reshaping the debt picture, we could end up back in the same sort of budget impasse a year or two from now (remember—the debt ceiling was raised seven times during the Bush Administration, so these debates can happen pretty regularly).

But, in the short-term, this historically buyers-friendly market will hang around just a little bit longer.

2a. No deal. Mo’ recession.

Depending on who you believe, a failure to reach a deal would either lead to economic catastrophe or, well, it wouldn’t. Let’s look at the worst-case scenario first:

As we explained a few weeks ago, home interest rates are basically tied to U.S. treasury rates, so the effects of a Washington default will trickle down to states like Texas as well. Washington Post domestic policy blogger Ezra Klein explains:

It’s easy to understand why the government will have more trouble borrowing if it fails to pay its debts, or even has a difficult time paying its debts. It’s a bit harder to see why ordinary Americans, the city of Pittsburgh, hospitals in Iowa, and medium-sized corporations will have more trouble borrowing. But they will. […]

Much of the debt in the American economy, and in fact globally, is “benchmarked” to Treasury debt. When your bank quotes you a mortgage rate, the calculation begins with the rate on 10-year treasuries and then adds premiums for various types of risk specific to you and your area on top of that. “There’s a whole credit structure,” says Pete Davis, president of Davis Capital Investment Ideas. “Think of it as roads and bridges, but it’s finance, it’s all connected, and it’s all on top of treasuries. Your CD at a bank, your credit card interest rates, your car loans, your mortgages — that’s all built on Treasury rates. So when you shake the basis of it, everything on top of it shakes, too.”

This is how a default gets into the rest of the economy: It takes everything the financial markets thought they could know and rely on and upends it. It then shuts off credit, or makes it prohibitively expensive, for nearly every participant in the economy, from states and cities to hospitals and universities to homebuyers and credit-card applicants. That, in turn, freezes all of their activity, which destabilizes everyone who relies on them, which then destabilizes financial markets further, and so on.

There’s some history of this happening: In 1979, a combination of debt limit failure and a breakdown of the Treasury’s check-printing machines (!!!) alone led to a 0.6 point increase in interest rates ($50 to 100 billion per year in today’s terms) that lasted several years. And rating agencies like Moody’s have already put U.S. debt on review for a possible downgrading from AAA status — which alone could make interest rates spike.

In other words, things could get complicated quickly, leading home interest rates to rise.

2b. No deal. No problem.

Of course, many powerful voices in Washington contend that the fear about default is being overblown for political reasons, and that short-term default pain is bearable and necessary in order to put us on sound economic footing again.

If true, then the lucrative Texas home-buying environment should continue — especially while the Fed does everything it can to keep rates low to limit the impact of default on unemployment. Add in a healthier long-term debt outlook, and boosted investor confidence could spur the overall economy and housing market to more rapid improvement. Furthermore, that short-term pain (incurred while getting to such sound footing) could lead to a more sluggish recovery — counter-intuitively keeping the housing market ripe for home-buying.

More likely, however, is that the initial market turbulence will make borrowing at least temporarily difficult while the default sorts itself out. Lending tends to dry up during periods of uncertainty — even if the warnings about default turn out to be overblown.

So if you’re in position to pull the trigger on a home soon, it might be prudent to do so before we hit those rough waters. Apply online today to get the process started.

 
 

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