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Economic growth and prices head in different directions

By Holden Lewis · Bankrate.com
Friday, June 25, 2010
Posted: 9 am ET

The economy grew more slowly than expected in the first three months of the year, but prices rose more quickly than expected. This is a mixed report. On balance, I think it points toward higher mortgage rates, but I wouldn't bet my next paycheck on that prediction.

In the first quarter, gross domestic product grew at an annual rate of 2.7 percent, according to the Commerce Department. Investors and economists had expected the report to reflect faster growth of around 3 percent.

That slower-than-expected growth typically would imply a decrease in interest rates. But something unusual happened: Prices rose a bit faster than expected, at an annual rate of 1.1 percent instead of the expected 1 percent.

With inflation higher than expected, it seems that interest rates would rise. But there are a couple of caveats. First, a seasonally adjusted annual rate of 1.1 percent is very low inflation. Second, there's not a lot of difference between the expected 1 percent and the 1.1 percent that we got.

Mortgage bond prices are high and rates are low, and I think mortgage markets are searching for reasons to take rates higher. A dash of inflation would do that. And if lenders conclude that a sluggish economy makes lending riskier, that could lead to higher rates, too.

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3 Comments
Sterling W.
June 25, 2010 at 1:15 pm

It's not being "hit extraordinarily hard by the housing collapse" that's a problem. It's having bought into a extraordinarily inflated housing bubble that's a problem. All bubbles collapse—that's normal. It's the other way around that's the real issue—one that's yet to be addressed.

Holden Lewis
June 25, 2010 at 10:38 am

Wayne, have you asked a pool installer whether it provides financing? Some pool companies will lend you the money. I have no idea what rates and fees they charge, though.

As far as home equity loans: Yes, they are available for homeowners who have equity. If you bought your house within the past five or six years in California, you probably have little or no equity. But people who bought before that, or who made big down payments, or who live in places that weren't hit extraordinarily hard by the housing collapse, might have enough equity to warrant a home equity loan.

Wayne Powell
June 25, 2010 at 10:10 am

How does one go about securing a loan for a swimming pool these days. Banks keep sending flyers about home equity loans ?? What equity are they talking about ? Most have none at the moment , correct ? We have excellent credit (in the 800's) and would like to find some decent, affordable financing. Any idesa out there ?