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Mortgage Rates: Impact of the Credit Rating Downgrade

We want to discuss the impact the downgrade of the U.S. credit rating will have on mortgage interest rates. In these times of uncertainty and volatility, no one knows for sure what will happen next. However, we want to talk about possible scenarios.

Mortgage rates normally run parallel to the country’s Treasury bonds. If many people are buying Treasury bonds the return on those bonds decrease. If less people are interested in buying bonds, then the return on those bonds must increase in order to draw more buyers. If bond returns increase or decrease, mortgage rates normally follow.

Many experts feel that the downgrade in the country’s credit rating will cause people to see greater risk and therefore be less likely to invest in our Treasury bonds. That would necessitate returns to push upward as any investor would seek higher returns as compensation for the perceived greater risk. If that happens, mortgage rates will probably increase. Many experts believe this scenario will take place.

However, others believe the exact opposite could happen. If people think the U.S. is struggling financially, they may question the entire world economy.  If they do, they might still trust the U.S. bonds over other investments. Then, Treasury bond returns would decrease as demand increases. Mortgage interest rates may actually soften in this scenario.

Bottom Line

Again, no one knows for sure what will happen. Rates could go up, go down or stay relatively unchanged. We will keep you current on any movements in rates.

To all economists and to all who wish they were: We realize this is an oversimplified explanation of a very complicated issue. We attempt to help our readers get a basic understanding of situations that impact the housing market. If you want to share a more complicated explanation, please feel free to comment. – The KCM Crew

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