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Tuesday, 15 May, 2001, 20:37 GMT 21:37 UK
Will US mortgages fall?
house in the US
Will home-owners be cheering the US cut in interest rates?
The fifth drop in interest rates by the US central bank on Tuesday will mean lower mortgage rates for homebuyers. Or will it? BBC News Online's David Schepp in New York explains why it may matter very little.

It is just another tiny example how the United States and the United Kingdom differ.

When the Bank of England recently cut UK interest rates by a quarter point to 5.25%, banks and other lenders scrambled to lower their own interest rates on their products.

For example, seconds after the Bank announced its decision, some of the UK's leading mortgage lenders, including Halifax and HSBC, announced they would cut their interest rates on mortgages.

But in the US, despite another interest-rate cut by the central bank of a half percent to 4% chances are interest rates - specifically mortgage rates - will not move much.

Unlike in the UK, most US households have fixed, not variable rate mortgages, and so they only receive a reduction from lower interest rates when they remortgage.

In fact, the recent rise in the US unemployment rate may do more to affect mortgage rates on this side of the pond than any move the Federal Reserve might make.

Economic data holds sway

Believe it or not, US interest rates are as much at the mercy of the general feeling of the economy as the US dollar.

Downbeat economic news, such as the recent reported rise in the unemployment rate to 4.5% in early May, will cause mortgage lenders to lower their rates in order to entice otherwise wary customers.

Of course, the opposite is true, too. Just before the government reported the shocking rise in the unemployment rate, a bevy of positive economic data had pushed rates higher, putting off would-be homebuyers from applying for mortgages.

In the US, mortgage rates rise and fall based on where traders on Wall Street see the country heading. They watch key indicators, such as the nation's unemployment rate, retail sales, or waxing or waning consumer confidence, and place their bets on whether the economy is slowing or advancing and by how much.

These traders have a lot of cash on the table and therefore a lot at stake. So it is crucial to them that they have current and trusted information on gauging in which direction the economy - and interest rates - is heading.

Strong consumer demand

Despite the recent downturn in the US economy and a subsequent drop in consumer confidence, Americans are still willing to spend on big-ticket items such as automobiles and houses.

According to the National Association of Realtors, data for March, the most recent available, show near-record levels of home sales throughout the US.

National Association of Realtors chief economist David Lereah said the rate was just shy of the all-time record pace in June 1999. "Clearly, mortgage interest rates that are near 30-year lows are bringing many buyers into the market," he said.

In the Northeast US, which contains some of the country's largest cities, including New York, Philadelphia, Washington DC, and Boston, house prices rose nearly 8% above levels last year.

Bidding wars in certain New York and New Jersey counties surrounding the city of New York are common. One realtor in Westchester County, New York, just north of the city, noted that any home selling for less than $400,000 (281,000) would probably be bid up in price.

In other words, for consumers bad news on the state of the US economy can be good news - at least in terms of interest rates. And while many Americans may be getting pink slips as the economy cools, others are getting great rates on home mortgages.

See also:

15 May 01 | Business
10 May 01 | Business
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