Just the other day, one of my clients asked me what I thought would happen with interest rates this year and whether or not she should lock in a rate now or wait a little longer. She is buying a new construction home that will settle in January/February of 2009. To get an answer, I contacted Richard Miller of Capital Mortgage Finance. He lives with this question day in and day out and here are his thoughts:

It's not as simple as stating a number that applies to everything.  There are rates for banks, rates for consumers, some for new, used, personal, homes, etc.  There are many different rates for different items.  When talking about mortgage rates, all lenders follow a similar guide, which is the bond market.  The 10 year and 30 year bond markets are a general guide to where rates will be any given day for a 30 year fixed mortgage.  Of course this rate can change at any time, so trends are sometimes difficult to find.
 
Historical data show that rates tend to move down in a recession and move up when inflation is high.  This coincides with the flow of money via the Federal Reserve in connection with the economy, and whether the economy is slow or hot.
 
Our current situation is unique.  Inflation is rampant with gas and food prices moving upwards, but the economy is slow and house prices have slipped.  At no other point in history have these three things occurred together.  The Federal Reserve is trying to figure out the next move, and no one is sure what it is.  Should rates go down, go up, or stay the same?  Let's look at all three.
 
Go down:  The Federal Reserve has set the Prime rate at one of the lowest levels ever to combat the slow economy and help shore up the financial industry which was hit with too many sub-prime loans and foreclosures.  The lower rates have helped, but rates are very unlikely to go lower, since lowering rates more would make inflation an even greater issue.
 
Go up:  Rates should go up to fight inflation and strengthen the dollar, all things that are hitting the pocketbooks of Americans today.  The down side is that if rates go up, the financial industry will have a more difficult time keeping the money flowing while they're trying to shore up the loan loss side of the balance sheet.  Obviously more expensive money to the Bank means a lower spread.  An unfortunate Catch 22.
 
Stay the same:  This is the likely outcome in the short term up to the Election.  Today and tomorrow (August 5 & 6, 2008) the Fed meets and we’ll have a better idea after they speak.  The best reason for status quo is that in the short term, Banks still need the lower short term funds rate, even though inflation is very high. Gas prices have moved downward by 20% in the last 30 days, which will help the inflation front.  Home prices are still shaky, and mortgage rates already include a risk premium making long term rates for a 30 year fixed fairly steady at @6.50%. 
 
Richard’s best guess is that mortgage rates will hover between 6.50%-7.50% through the election and then all bets are off, depending on who wins in November.