How Will The Growing National Debt Influence Mortgage Rates Going Forward?

Question

I peek at the debt clock every so often:

Debt Clock

shake my head and wonder what is going to happen.  What do you see happening with this long term?  What, if anything, will our rising debt burden do to long-term real estate borrowing costs?

Gregory Childs · Answer

Realistically we are at historically low interest rates - so it is reasonable to assume that they wil rise over time - whatever happens to the debt.

Our financial institutions (and the resulting prices they charge for their instruments) is based on the "perception" of stability - which has little to do with reality. Similarly, the vlaue of our stock markets (and subsequently the companies they represent) is affected greatly by market confidence factors.

We have become a PR driven economy (belief vs. fundementals). Therefore, the cost of our financial instruments and the value of our corporate assets are significantly influenced by perception of items such as the debt clock and not the actual debt itself.

I was watching CNBC this morning and they were discussing the replacement of the dollar as the reserve currency "IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system." This shows the significant global concern regarding the long term stability and sustainability of the US economy. Our debt load has to be a fatcor in that perception.

If we show that we have the "growth" of our debt under control (and have a plan for reduction over time) and we demonstrate positive economic trends (no double dip) - the perception of our economy will be fair and finance rates will be stable. If not, there's always Aruba or the Seychelles!

This should be an interesting couple of years.
TTFN,
Greg

Bryan Hancock · Answer

Nice post Greg!  I completely agree with you about valuations being based more on perception than reality and I also agree that restoring financial prudence SHOULD keep us viable in the long run.  I am wondering if the debt market investors will eventually force our government's hand on borrowing costs though.

Ideas?

Bill Gulley · Answer

There is nothing to fear, but fear itself.