Ugly Economic Data May Push Mortgage Rates Lower, Eventually

by Alex Stenback on October 16, 2008

In the words of one economist, commenting on the poor retail sales report released yesterday:

This is hideous…There can be no doubt now that the economy is in recession

And it wasn’t just retail sales.

  • The Empire State Manufacturing Survey, considered a proxy of sorts for national manucfaturing sector, showed activity sharply contracting.
  • The Beige Book, a report on economic conditions drawn from the 12 Federal Reserve Districts, detailed a weakening economy led by contracting consumer spending.

That was Yesterday.  Today, we have the Consumer Price Index, Weekly Jobless Claims, Industrial Production, and The Philadelphia Fed Survey

Most experts expect more evidence of an economy in retreat, and the Chairman of the Fed talking out loud about a slowing economy

Though all of this is obviously not-great news for the economy at large, there is at least one positive aspect: Mortgage rates may improve.

In other words, economic data is starting to confirm a recession.  And if we are in a recession, the likely outcome for interest rates is that they will remain low, or go lower.

There are many reasons for this, but mainly it’s because slow economies don’t often induce inflation, and many investors choose to weather an economic downturn in the safe haven of bonds, rather than stocks or other assets that may be riskier in tough times – and, as regular readers of our ramblings will know, increased demand for bonds (Mortgage Backed bonds, in particular) drives mortgage rates lower.

Now, it may take some time for any improvement in mortgage rates to materialize, so this is a longer term view.  In the short run, the market has a couple of issues to work through – oversupply, and forced selling of mortgage related assets (see our posts here, and here for more on those topics). 

But over the long haul, if/when/as the economy slows, we may see lower mortgage rates.  Silver lining anyone?

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