October 19, 2000

Election mojo and mortgages

The conversations around election-year interest rates always find me grinning. In fact, I spoke with two women this week who told me they were in no hurry to lock in to home-loan rates because they were certain the numbers would drift back down in a few weeks "because it's an election year."

That brought back memories of the man I once knew that tried everything he could to delay borrowing money until an election year. He was an investor who would avoid locking in home loans until a presidential campaign was heated up and in the news. To say he was preoccupied is an understatement. He once extended the closing on a mortgage loan five months to get an election-year interest rate.

    Obviously, the man honestly believed that interest rates always decline during a presidential election year. He was wrong. 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-loan 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."

David Lereah, recently appointed as the new National Association of Realtors' chief economist and senior vice president, has known French for years and chuckled when informed of the statement.

"I do, however, think if this were not an election year that the Fed would raise rates 'one for time for good measure,'" Lereah said. 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). Given the state of the current economy, it is likely 2000 will be the eighth presidential election year for rates to rise -- hardly an argument for closing mortgage loans in presidential election years. Although rates are close to their lowest level of the year, they are higher than a year ago.

  The 10-year Treasury bond rate fluctuation the year before and the year of off-year (Congressional) elections has been greater. The year before, they've risen five times and dropped five; in the Congressional election year they've risen six times and dropped four.

To take all this information and project which year you should commit yourself to a home loan is just not possible, despite what the investor I knew believed.

The two presidential candidates probably sees themselves in a promoting dilemma -- if  one highlights the fact that unemployment is relatively low and the economy is healthy, the opponent will undoubtedly scream that interest rates are rising and potential buyers no longer can afford homes.

You simply can't have both -- even though strategists have been working for years to soften the balance.

  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.

For example, 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.

The thing to remember as this presidential campaign heats up is that interest rates will rise with economic recovery and then fall when the fears of inflation ease - regardless of who takes credit for what.

As French said 12 years ago, political parties are too puny to "move interest rates in this world."

Previous columns:

• IRS OKs reverse exchanges  , 10-12-2000
• New NAR economist sees lower rates ahead, 10-05-2000
• Dot-coms offer help to renters, 09-28-2000
• Helping the kids buy that 1st house, 09-21-2000
• Dorm option: Do you really want to play landlord?, 09-14-2000
• Location, location, schools, 09-07-2000
• Beware the predatory lenders, 08-31-2000
• Fix-up, remodel or move, 08-24-2000