No Change in Mortgage Rates Expected Today as European Debt Crisis Simmers

Mortgage rates will likely stay close to current levels today.

Mortgage interest rates change when economic conditions clearly change.  Our economy is changing—though it’s not clear if this slowing trend is short or long term or whether global events will over-power our domestic issues.  This slowing economy has been confirmed repeatedly over the past few weeks.  Today it was the May report on durable goods that points to the slowdown in the US economy. Yet news about the Greek debt crisis may have a bigger impact.

Durable goods are items that last—things that consumers and business replace infrequently.  Durable goods include washing machines, cars, planes and computers among many others.  When durable goods orders increase it is a sign that consumers and business have confidence for the future and are willing to invest in expensive goods that can improve their quality of life or efficiency.  When consumers and businesses put off purchases of durable goods it can suggest uncertainty or even fear about future economic prospects.

The May Durable Goods Report was down far more than expected.  A drop was anticipated in demand for these goods despite the April report showing a strong surge in demand.  What happened?  Two things are being suggested as reasons for the dramatic shift.  First, gasoline prices climbed significantly during this period.  Second the effects of the Japanese earthquake and tsunami were apparent in automotive and other manufacturing industries.  If these explanations are accurate then there is reason to believe the May report is an outlier and June’s report could reverse course.

The inability of Greece to pay its debt to support its spending, has led to a chorus of voices now suggesting that the only viable solution is for Greece to default.  A default occurs when a borrower fails to repay a loan according to the contractually agreed upon terms.  In the case of Greece, they have needed a major infusion of borrowed money from the International Monetary Fund and the World Bank as well as issuing huge amounts of bonds in order to continue to fund their activities.  Unfortunately it appears likely that Greece will not be able to reduce expenses sufficiently or generate sufficient revenues to be able to repay those loans or bond-holders according to the original terms—hence a default.

The idea of a “soft” default is being suggested.  In this type of default the term of the loans or bond maturities are extended but the loan is not forgiven or written off.  While this may help Greece, it has two negative consequences.  First it does not impose a penalty on the Greek government and people for overspending and under-producing.  Second it could cause a major bank solvency problem as European banks are major holders of Greek bonds.

Too many unknowns are at work in our economy to forecast a major change in mortgage  rates over the near term.