Posted 09/27/2010

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How Deflation Changes Mortgage Rates

The relationship between deflation and mortgage rates

Dan Green

The Mortgage Reports Contributor

The relationship between deflation and mortgage rates

What Is Deflation?

Deflation is an economic term for when purchasing power increases over time; when inflation rates go negative. It's a rare occurrence and is generally experienced from a perspective of "falling prices" on everything from fruit to tires.

Being able to buy more with less money may seem like a positive, but over the long-term, it can be awful. Deflationary cycles are difficult to break and even more difficult from which to emerge.

The chart at top shows why that is.

Deflation Chatter Is Picking Up

According to Google, "deflation" chatter is growing.

Since the start of the year, mentions of "deflation" have grown steadily, with a spike in the last two weeks. It's one reason why mortgage rates have idled despite data suggested they should rise.  And so long as deflation is in the news, that pattern should continue.

Don't rest on your rate locking laurels, though.

For now, deflation chatter is only that -- chatter. There's nothing to prove that deflation is truly present. Therefore, while fears are high, it may be your best time to lock a low mortgage rate. If deflation is proved non-existent, mortgage rates will zoom.

Lock A Deflation-Anchored Mortgage Rate

To get a mortgage rate quote, start here.

Dan Green

The Mortgage Reports Contributor

Dan Green is an expert on topics of money. He has been featured in The Washington Post, MarketWatch, Bloomberg, and others.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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