3 ways Hurricane Sandy could impact mortgage rates

November 02nd, 2012

When 30-year mortgage rates rose by four basis points last week, Hurricane Sandy was mere possibility. But the brief rise in rates may not compare to how much they could rise by the time the economic impact from Hurricane Sandy is fully assessed.

Even after rising to 3.41 percent, 30-year mortgage rates are still close to their all-time low, and thus should still be attractive to new buyers and refinancers. However, the extreme low level of mortgage rates also makes them vulnerable.

Mortgage calculators can help assess changes from "Exogenous Shock"

"Exogenous shock" is a term some economists use to describe a surprise event that comes from outside the normal economic system but which has an impact on that system. Hurricane Sandy certainly qualifies. If you are in the market for a mortgage, you may have to keep a mortgage calculator handy to keep up with the changes in the weeks ahead.

Just as the extent of hurricane damage is tough to fully predict, the economic aftermath is somewhat uncertain, as a range of factors interacts and plays out over time. So, while the exact economic impact of Hurricane Sandy is yet unknown, here are three ways the storm could affect mortgage rates:

  1. Inflation impact from supply disruptions. In general, higher inflation means higher interest rates. Hurricane Sandy has disrupted supplies of goods and services both directly (e.g., by damaging refining capacity) and indirectly (by damaging transportation infrastructure). Supply constraints tend to lead to higher prices.
  2. Inflation impact from demand surges. The economic impact is likely to be uneven -- that is, demand will fall in some sectors while it could spike upward in others. Unusually high demand for things like building materials and construction equipment could create inflation pressure.
  3. Overloaded financing capacity. As people rebuild, loan demand could accelerate, overwhelming the processing capacity of lenders in the northeast. The mismatch of supply and demand for financing could push rates higher. It will be interesting to track whether regional differences in rates widen in the weeks ahead, which would suggest constraints on financing capacity in the northeast are taking a toll.

One of the great things about loan calculators is that they make it easy to do scenario testing -- that is, they can help you see what the impact of several possible outcomes would be. That's a good way to prepare for a range of possible outcomes in an unknown situation, which the aftermath of Hurricane Sandy represents.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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