The number of presidential television advertisements seems to be overwhelming for May and June. The election still is in November, isn’t it?
Perhaps the candidates feel there are more negatives in the mix this year so an earlier damage-control campaign is in order. One factor is that mortgage interest rates stand a very good chance of going up a tick, contrary to the popular perception of election year rate movements.
Most real estate analysts and economists say home loan rates could be a full percentage point higher (rising from approximately 6 percent to 7 percent) by the end of 2004.
“The number is going to be higher than what we’ve been used to the past few years,” said John Tuccillo, former chief economist for the National Association of Realtors and now a housing consultant and author. “It’s also going to bring a little pain to the housing market.”
In reality, for the past 40 years, the chances of interest rates declining during a presidential election year have been poor. While there are fluctuations depending on the type of loan, the terms and the month the loan was written, the truth is that mortgage rates tend to go up more often than they go down during presidential election years.
Thomas French, former president of the Mortgage Bankers Association of America and a man who steers clear of unclear, middle-of-the-road statements, told me before the 1988 election: “I don’t think anything as puny as a political party or candidate can move mortgage rates in this world. They may hope, but it won’t happen.”
Sung Won Sohn, executive vice president and chief economic officer for Wells Fargo Bank, once worked with Federal Reserve Chairman Alan Greenspan and was a senior economist on the President’s Council of Economic Advisors. Sohn is very aware Greenspan will not want his legacy to be that of higher interest rates during his final years as chairman.Greenspan recently completed his fourth, four-year term as chairman and originally took office to fill an unexpired term as a member of the board in 1987.
In the last 10 presidential election years, the interest rates tied to the 10-year Treasury-bond rate went up seven times and dropped three times (by less than a half-percentage-point). For example, last year at this time the 10-year Treasury bond was at 3.2 percent, while it’s been hovering at 4.8 percent the past 30 days. Although rates are historically low, they are definitely higher than a year ago.
“I think there are not a lot of wild cards we can look at domestically that are going to bring rates back down,” Tuccillo said. “However, internationally there are two. The first piece is the price of oil. It’s feeding into the inflation that we are feeling – not just at the pump but in taxi fares, long distance shipping charges, airline tickets and then eventually into manufacturing components.
“The other big wild card is the Chinese economy. One of the big reasons we are seeing the pressure on commodities is the demand by the Chinese because they are growing so fast.”
According to Tuccillo, if the Chinese economy slows down and if we can somehow convince the oil producing countries to reduce the price of oil, then we could get back to an interest rate level we’ve seen the past couple of years. Other than those two wild cards, there isn’t much out there that is going to bring interest rates back down.
Most home loans are now sold as long-term securities on the international market to a variety of investors. They, not local bankers, now control long-term interest rates. In a capsule, things are so much more complex and different today. Local bankers no longer dominate the financial landscapes they serve. For example, years ago when the corner banker had plenty of cash in deposits, he typically lent money at a cheaper rate. Now, there’s a definite international influence.
If the Saudis decide to hold down the price of oil, it will affect what you pay at the pump–and probably what you pay for a home mortgage. This move typically has nothing to do with a specific political party in the United States. Even the Federal Reserve Board doesn’t have the long-term power to keep rates down like it once did. It does react to harness and stimulate the economy as it sees fit, but other countries now have to cooperate.
Lately, it’s been difficult obtaining cooperation.
Tom Kelly is a syndicated columnist and talk show host. He can be reached at news@tomkelly.com.
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