Will the Fiscal Cliff Reduce Mortgage Rates?

by Redeeming Riches on December 19, 2012

No matter which side of the aisle you’re on, everyone can agree that it’s nice to have the elections behind us. No one likes uncertainty, least of all investors — and that means homebuyers as well. That said, there’s a new question looming in all of our heads at this point — what’s going to happen with the economy given all of this Fiscal Cliff business?

Economists are all a-Twitter about how the Cliff is going to affect every market in the country, real estate included. Until D-day — December 31st — volatility is the name of the game. Once the day hits, the immediate impact is going to depend on what (if any) economic plan gets implemented.

As with most things, the more liberal the plan, the worse off it is for people doing any kind of investing, including purchasing property. Fortunately, the President isn’t unreasonable and understands that spending cuts are actually a necessity on some level, so even the ‘blue’ plan will benefit us a little bit.

Because almost any plan will involve spending cuts, it’s not a question of whether or not there will be a short-term drop in rates, it’s a question of how big and how long-lasting the drop will be.  Spending cuts, so you understand, mean less money moving from the public sector into the private sector. All other factors being equal, this tends to put downward pressure on the economy.

The ‘red’ plan involves $2.2 trillion in spending cuts. That’s $2.2 trillion that’s not moving into and through the private sector, which puts downward pressure on demand, keeping interest rates — including mortgage rates — lower.

If the cuts are relatively minor, the drop may be 1/8 of a point or so. If the cuts run deep and austerity becomes the new normal, it may actually be a good sign for real estate buyers, as the cuts will be more dramatic and longer-lasting. If there is no plan at all, the cuts will run deep, and it may even be the best result for homebuyers in the long run — it’s hard to tell.

Either way, however, the investors with an eye toward the long term will be waiting until the Cliff comes and taking advantage of whatever rate reduction materializes from it. Even if it is only a 1/8 of a point, that still can mean thousands of dollars over the life of a mortgage.

About the Author:

This is a guest blog post from Richard Simon, an Arizona based mortgage expert and co-founder of Realty AZ Central. Realty AZ Central is a Phoenix Arizona based real estate marketplace offering a host of home buyer and seller resources including home selling tips, mortgage lender referrals, and a local real estate agent network.

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