[quote=peterb]That was my initial reaction as well. But it’s more about supply/demand for the actual interest rate or cost of the money. As now the market has lower rates, but down payments have become important again as has strict documentation. Risk will be better mitigated through lower LTV’s and better documentation. I think we’re seeing this now and will see it more inthe future. I would not be surprised to see real CPI going negative in 2009. Check out ECRI’s website for more on this. So, in essence the old 6% is the new 4%. Economics takes on a different set of rules when inflation is now longer running the game.[/quote]

what is ecri?

i don’t understand your inflation argument; during the past 30 years, we’ve had relatively constant and steady inflation and yet interest rates fluctuated like an osciliscope. even now, rates are still historically low despite the massive credit induced inflation of the past 7 years.
where’s the deflation come in?

what i see is artificial manipulation of mortgage rates. the fed is buying gse’s, the fed came right out and said they would do so. there isn’t so much “organic” demand outside of the fed. they are the ones creating the demand and lowering rates in order to try and prop up the housing market. how long can the fed do this before it impacts the gov balance sheet and the cost of gov debt? not long, i don’t think. to me, this says that inflationary policies cause lower cost of debt due to the high supply of money. whereas, deflation, the destruction of money, decreases the supply and therefore drives rates up. isn’t that what volker did in the 70’s-80’s? destroy the money supply in order to drive rates up? isn’t that what happened when greenspan in 03’ish implemented loose (inflationary) money policy and drove rates down?