War: How does it affect mortgage rates?
By Holden Lewis • Bankrate.com

A decade ago, the United States waged war in the Middle East. Now we're waging war in Afghanistan. Can we predict what will happen to mortgage rates now by looking at what happened to mortgage rates then?

In a word: No. The circumstances of 1990 and 1991 don't have much in common with what's happening now.

Mortgage rates went up slightly after Iraq invaded Kuwait on Aug. 2, 1990, then dropped during the military buildup and the air and ground wars. Rates went up a little after the ceasefire in February 1991, then fell in late summer and continued to fall for two years.

"I'd say (that comparison) would be a tough, tough one to make because the basic structure of long-term interest rates is different now," says Phil Colling, an economist with the Mortgage Bankers Association. "The structure of the economy is much different today. Ten years ago the word Internet was a theoretical term, and information technology is so much more advanced than it was 10 years ago."

And back when Saddam Hussein invaded Kuwait, mortgage rates had room to drop. Right now, rates are near modern-day lows already.

Up, then down
According to Bankrate.com's database of interest rates, the average rate on a 30-year mortgage stood at about 9.84 percent when Iraq invaded Kuwait. By the end of September, almost two months later, the average 30-year fixed rate was 10.04 percent.

Things didn't get better for a few weeks: By mid-October, the United States had 200,000 troops in the region, and interest rates were 10.05 percent. It has never been that high since. By the time the air war began, on Jan. 17, 1990, the average 30-year rate was 9.55 percent.

Today, the average 30-year mortgage rate is less than 6.9 percent, much lower than in 1990 and 1991.

No more guilt
Colling remembers the first half of 1990 as a time when the economy was strong. Then came the invasion of Kuwait, a rapid rise in the price of crude oil and gasoline, and a sense of guilt over the free-spending ways of the 1980s.

"All of a sudden there was this talk in the media and during coffee breaks how we Americans were too opulent and we spent too much, and Americans should spend $5 for a gallon of gasoline like they do in Europe and Japan," Colling says. "I think there was a case of feeling guilty for being an American and I think that, at least partly, was why we went into a recession."

Actually, it turns out that the United States entered into a recession in July 1990, a few weeks before the invasion of Kuwait. According to the National Bureau of Economic Research, the recession lasted until March 1991, shortly after the Gulf War ended.

Colling is right that there was a lot of hand wringing in 1990 over Americans' fuel consumption. This time we haven't heard much criticism of our love of sport utility vehicles and minivans. In fact, we're told that it's our patriotic duty to spend -- on American-made cars, on vacations in New York, on airline travel. In other words, on activities that burn a lot of fuel.

Banking on the Fed
More important, Colling says, is that the Federal Reserve now has 11 more years of inflation-fighting history that the bond markets can depend on.

Long-term interest rates, such as those for 30-year mortgages, tend to follow the interest rates paid on Treasury notes and bonds. In other words, the people who buy and sell government securities influence mortgage rates.

Back in 1990, bond traders weren't sure that they could trust the Federal Reserve to fight inflation, Colling says. Bond traders had fresh memories of the autumn of 1981, when mortgage rates exceeded 18 percent and the Fed's monetary policies were held partially responsible.

Nine years after those stratospheric interest rates, in 1990, bond traders worried that the Fed might overreact to any economic slowdown, flood too much cash into the economy, and ignite inflation, Colling says. As a result, interest rates didn't drop quickly enough to stave off a recession.

In the past decade, Colling says, the Fed has proved that its priority is fighting inflation. Bond traders feel more confident that the Fed will react swiftly if today's low interest rates cause inflation to re-emerge.

The bottom line is this: In 1990, mortgage rates had room to move up or down, and they did both. Today, they probably can't go much lower than they already are. But since the Fed is in recession-fighting mode, interest rates probably won't go up much, either.