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6% today it's hard to imagine that we can ever go back to the sky high double digit rates in the eighties but our next guest says.
Between the deficit in the debt he could be in for definitely increase.
Greg McBride senior financial analyst at Bankrate dot com joins us from your god bless the -- -- but.
-- the way -- kill me.
I still look.
My first -- that early ninety's they were at the rate was down -- about 9% but the eighties definitely saw a double digits at least 10% summer getting eleven and twelve.
Headed back there aren't we.
I don't subscribe to those doomsday theories Tracy that we are going back to those double digit interest rates but I think we're very likely headed for an increase and a significant one.
Because the decade we've just come out of has been one of record low interest rates and where we're still very near those levels on mortgage rates between the -- of record budget deficits the an ongoing debt is debt issuance from the -- -- from the government and if I think.
Inflation is likely to increase even if it's only modestly it's going to increase at some point -- -- all catalysts that will push rates upward.
In the years to come -- when I think in 1979.
I think of you know the country in one of the worst recessions we've been in.
The oil embargo interest rates through the roof.
And yet we make -- turn to Reagan's presidency and we have the eighties and prosperity.
Why are interest rates still so high when the country was going through such a prosperous time and are coming out of the recession it late seventies.
Well a lot of that -- in high interest rates in the 1980s was the disorderly that would necessary evil to slay the dragon of inflation inflation had been very high here in the seventies.
Early eighties Paul Volcker who was then the Fed Chairman raised in a short term interest rates to prohibitively high levels in an effort to kill inflation.
And it worked body took quite some period of time the remainder of the decade before you started to see long term interest rates permanently count down because you know once inflation.
Had been put to rest there was this ongoing concern in this ongoing fear about OK with the government had been issuing a lot of debt.
What happens if inflation comes back he kept a premium on those long term interest rates.
And mortgage rates reflected that staying in double digit territory until 1990 Greg is that why there's the fear that maybe we we get to that point again because it.
Maybe Ben Bernanke won't be able to get ahead of inflation this time around.
And we'll see rampant inflation like we saw in the late seventies and he'll have to -- -- his successor we'll have to Paul -- In the next ten years.
Thought well that's a legitimate concern I think he had that.
Some legitimate questions about OK does the sad -- that its chairman Bernanke or or somebody who later succeeds him.
Do they have the backbone to stand in front of congress and tell them that hate.
We're gonna raise interest rates and we're going to do it regardless of how high unemployment is or how many foreclosures are out there happening.
And if the market begins to question whether or not the Fed has the backbone to do that.
That's another impetus for higher rates that's -- that's another thing it's gonna feel those inflation premiums they keep both mortgage rates in long term interest rates higher so.
Yeah that's a very relevant consideration and as I said earlier I don't necessarily subscribe to the idea that we're going back to double digit interest rates.
But if inflation went to five or 6% for any length of time that's problematic enough because -- be seeing those mortgage rates.
You -- up in the neighborhood of nine -- you know 89%.
Which coming up this decade of where we've been spoiled and is really low rates.
It will it would seem prohibited it -- -- many homebuyers.
So bouts of -- right prices have come up interest rates have come down.
Are we seeing no -- talk about the similarities between the two decades you know the easy start we have to -- creative products come to market creative mortgages especially in the commercial real -- area.
We're definitely saw that when you know the whole sub prime mess hit in there.
You know live -- -- an argument that we are sort of on the same path.
Well good the product database in the united -- -- -- is a lot of that in the early eighties.
-- -- the adjustable rate mortgages actually turned out to be very favorable product because interest rates declined.
Very consistently for a decade or more and -- doesn't adjustable rate mortgages actually turned out to be favorable.
What would with -- shoe was on the other foot the earlier part of a bit in the 2000 decade.
Interest rates from record loves and you saw this continued emphasis on adjustable rate in exotic mortgage products that type of products that would deliver big payment increases once interest rates went up.
But it doesn't take -- -- trying to figure out that when interest rates are record laws that pretty much only have one direction to go.
And sure enough that's that's the root cause of what we -- during -- -- this this housing meltdown.
Again great rates are still very very -- fixed mortgage rates are record lows so that's for the value was for homebuyers.
-- -- all these defaults going on -- a lot less tolerance among investors.
As well as borrowers for the riskier adjustable rate products Greg -- -- short term here April 30 you've got.
News that housing stimulus essentially this buyer credit expiring.
You've got even before that you've got the Fed stopping this purchase program of mortgage backed securities and -- What is this gonna mean for rates in the shorts and Communists he is speicher immediacy is slowly easing up.
I think when when the Fed -- -- in the mortgage market the purchases of mortgage backed securities are in the month of march.
I think you're looking at about a half a percentage point increase in mortgage rates relative to treasury yields.
-- -- get the big question is okay -- what happens to treasuries and if we continue to have these concerns about Greece.
Economies particularly in Europe.
That could keep treasury yields -- and maybe dilute some of that increase you'd otherwise see mortgage rates but the bottom line is when the Fed pulls out of the market.
The private investors -- command are not gonna pay the premium prices at the Federal Reserve has been paid to these mortgage backed securities.
And that's going to -- a bigger spread than we've been seeing in recent months on mortgages vs about risk free treasury debt.
All right thank you greatly appreciate Greg McBride senior financial analyst at Bankrate dot com giving us the lowdown on mortgages today and yesteryear now.
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