Are mortgage rates on a downward slide to 4.5% — or even 4% — for a 30-year fixed-rate mortgage?
Even one year ago, that would have been considered a comical statement, and the economist who suggested it might have been fitted for a drool bucket and a straitjacket.
But maybe the thought of mortgage rates going to 4.5% or lower isn’t so crazy. Not after mortgage rates fell again last week, and substantially so. According to the BankingMyWay Weekly Mortgage Rate Tracker, the 30-year fixed mortgage rate fell from 4.9% last week to 4.775% this week.
Granted, that’s still a long way off from 4% and that level may never be reached. But it’s only a short slide to a heretofore-unthinkable 4.5% 30-year mortgage rate — it’s only about 28 basis points away.
Only last August, 30-year fixed-mortgage rates topped 5.5%, and it’s been pretty much a steady, downward slide ever since. What’s the deal?
Some economists, like The New York Times’ Paul Krugman, believe low rates are a related to a deflationary spiral that could be with us for a decade (he compares the current rate environment to Japan’s recent “lost decade” that was also fueled by aggressive deflation).
By definition, deflation occurs when asset and consumer prices are in steady decline. While that might seem like manna from heaven to U.S. consumers, who would likely appreciate cheaper prices for goods and services, deflation is not what it might seem at first glance. Normally, a decline in consumer demand means the economy has stopped growing (and may even be in decline) as high unemployment, falling wages and sliding housing and stock portfolio prices combine to grab a slow stranglehold over the economy. Sound familiar?
Economists usually track the U.S. consumer price index for signs of deflation. According to the U.S. Bureau of Labor Statistics, the CPI for May 2010 fell by 0.2%, not a big slide by any means. And most CPI indicators say that consumer prices aren’t in decline just yet, as higher energy prices have kept the broader CPI in check. But if the overall CPI number continues to fall, that could be a major sign that the U.S. economy has fallen back into a deflationary-fueled recession, and potentially a major one.