- The Washington Times - Thursday, August 5, 2004

Q:I am under contract to purchase a new home that will be completed in

about eight months. My question is this: Can I expect mortgage rates to be about the same in eight months?

I realize rates have increased, but is a reversal anticipated based on the presidential election?

A: The notion that interest rates are kept down during an election year seems to be quite common because I hear it all the time. Apparently, a lot of folks think a sitting president has the ability to control interest rates during a crucial election period.

Frankly, I never bought the idea. True, some interest rates are directly or indirectly controlled by the Federal Reserve Board and its chairman, Alan Greenspan. These rates include the federal funds rate, which is the rate that banks charge each other for overnight funds, and the prime rate, which influences rates on credit cards and home equity lines. The Fed also can have some effect on certain mortgage rates, such as short-term adjustables.

But the Fed does not control mortgage rates. These rates are set by market forces. Economic news and world events typically affect mortgage rates, usually daily. Without going into a detailed explanation, let me give you the bottom line: Long-term interest rates, such as 30-year fixed-rate mortgages, tend to rise if inflation, or the anticipation of inflation, accelerates.

Inflation often follows strong economic growth or a tight labor market. So whenever an economic report comes out and surprises investors with strong economic numbers or and unanticipated wage and price increase, we can expect an up-tick in interest rates.

By the same token, a report that comes out with unexpectedly weak numbers or modest inflation may send rates down. My belief is that it is difficult to predict where the economy is headed, so the direction of mortgage rates is difficult to forecast, especially over the short term.

Most analysts are in agreement that the economy is indeed picking up steam, and most economic reports support this notion. This certainly explains the recent rise in mortgage rates. But unpredictable global factors also play a significant role. A terrorist attack, a major change in the war in Iraq, or increased political instability in a foreign country can cause U.S. mortgage rates [R]to move.

Let me get back to the presidential election. Though a change in leadership in the Oval Office can alter investors’ perceptions and affect interest rates, the sitting president has no real power to lower mortgage rates to help a re-election bid. In fact, I did a little poking around on the Internet and found out that in the past 10 presidential election years, mortgage [R]rates increased in seven [R]of the years.

If the economy continues to grow at the currently anticipated healthy level, it’s certainly reasonable to suggest that mortgage rates might be a bit higher, assuming there’s no [R]global incident that takes us [R]by surprise.

Henry Savage is president of PMC Mortgage in Alexandria. E-mail your questions to [email protected]

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