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How will war affect mortgage rates?
By Holden Lewis · Bankrate.com
War will affect mortgage rates. Experts agree on that. They disagree about which direction war will send rates for long-term mortgages. It largely depends on how the war goes, and battle is unpredictable.
"The situation is going to completely determine the response, and I can't tell you any better than the next guy -- because I'm not a military analyst -- what the different outcomes are," says Dorsey Farr, senior economist for Balentine & Co., an Atlanta-based investment analyst firm.
Farr believes that if initial reports imply a quick military success, mortgage rates probably will rise. If the war goes worse or lasts longer than expected, rates could fall -- but not much, Farr predicts.
He thinks rates don't have much room to drop because they are so low already. And they are low because mortgage rates tend to move in the same direction as yields on U.S. Treasuries. Those yields have fallen to 40-year lows as investors pulled their money out of the stock market and bought ultrasafe Treasury notes in what has been called a "flight to safety."
There is general agreement with Farr among economists and investment analysts who work outside the mortgage industry. On the other hand, mortgage lenders tend to believe that the start of war will mean a jump in mortgage rates.
"I think rates will continue to rise until there's a positive direction how this war is going to play out and we know what the future holds," says David Motley, Executive Vice President of Colonial Savings in Fort Worth, Texas. "Rates have gone up about three-eighths of a point in the last 10 days. I think that is factoring in a quick resolution to the war, an improving economy, and a flight of all this money back in the stock market to some extent."
Ellen Bitton, president of Park Avenue Mortgage in New York, concurs. She looks back at what happened 12 years ago.
"If the Gulf War experience means anything, there was an immediate surge upward in the rates and they fell back within a couple of days," Bitton says. "The initial effect of uncertainty makes rates go up. Once there is certainty that everything will work out OK, then rates typically fall back somewhat."
Many mortgage professionals suspect that mortgage rates bottomed out around March 10 and 11, that the war will go fairly well for the United States, and that mortgage rates will rise for at least a few days or weeks. In Bankrate.com's weekly survey of mortgage experts, 58 percent predict that rates will rise in the next 35 to 45 days, and one-third believe rates will drop during that period.
Keith Stock, who didn't vote in the survey, agrees with the minority. "I think we'll see mortgage rates trend down a little more because the war has created uncertainty, which is being resolved, which is good news," says the vice president of Cap Gemini Ernst & Young's financial services sector.
Stock believes that investors soon will switch their focus from the war to the weak economic situation, with rising unemployment, falling consumer confidence, delays in passing the president's economic stimulus plan and projected U.S.-paid costs of $90 billion to $120 billion to repair Iraq.
The Federal Reserve, in holding short-term rates steady this week, "was holding their powder dry for the prospect that they'll want to reduce rates more -- but after the air clears from the war, to have more impact," Stock says. Long-term mortgage rates don't respond directly to the Fed's rate moves, but a Fed rate cut could contribute to an overall climate of falling interest rates, Stock says.
Economist Donald Dutkowsky says war's effect on mortgage rates "depends on whether the war is short-lived or longer-term."
"If this is a blip on the screen, about a month or two, it won't have much of a discernible effect," says the professor of economics at the Maxwell School of Citizenship and Public Affairs at Syracuse University. And if it does have an effect, he predicts that the war would send rates downward.
Dutkowsky, like Stock, perceives that the economy is cooling and that the Fed might feel compelled to reduce short-term rates for the 13th straight time since January 2001.
Sandy Lincoln, managing director of Wayne Hummer Investments in Chicago, has studied how markets reacted to both world wars and the conflicts in Korea, Vietnam and the Persian Gulf. "Basically, the markets dealt with the war periods pretty darn well," he says, producing returns comparable to non-war periods.
"It certainly seems that markets are able to look beyond and through war, and price things based on their underlying value," Lincoln says. For that reason, he doesn't think mortgage rates are going anywhere fast. The economy is recovering sluggishly, and the Fed might cut short-term rates again this spring. More important, inflation is in check, and that implies that mortgage rates aren't about to rise quickly.
That brings us back to Motley, the vice president of Colonial Savings who believes the start of war means an increase in mortgage rates. He thinks the rate spike will be temporary, for a couple of reasons. First, he thinks it's naive to expect the Iraqi conflict to be wrapped up quickly and tidily. Second, the economy isn't exactly going gangbusters.
The economy, and not the war, will have the greatest impact on mortgage rates in the long run, experts say. A sluggish economy could keep rates low for some time to come.
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