Downgraded. Now what?


It is official. Standard & Poor’s officially downgraded the United States credit rating from AAA to AA+. So… what’s next?

There are plenty of opinions out there. Some that feel the downgrade will cause investors to reconsider long-standing fundamental market assumptions. Others imply the S&P is possibly overstepping their bounds and made an illogical decision. A great article by The Economist insinuates investors have an interesting dilemma on their hands-purchase a currency that may default (downgrade), or the one that could disintegrate.

While there will surely be a wide range of impacts due to the downgrade, The Mortgage Blog attempts to keep its focus in the mortgage industry. What might we expect? Honestly no one knows.

  • Could their be another slow down in the housing industry? That depends on the economy. For now, some believe the threat of a double dip has been pushed off thanks to an encouraging jobs report for the month of July. However, should that outlook change and businesses get conservative in hiring/spending, who knows what would happen. A wild card like the downgrade could be the catalyst that continues the downward trend of stocks and sour the country’s economic outlook. When that happened in 2008, the resulting impact on the housing market was quite severe.
  • Could interest rates rise? Mortgage rates significantly rose on Friday after rallying for the first part of the week. With the downgrade taking place, one might assume bond prices would decrease as the Dollar’s credit rating has been reduced. When bond prices decrease, interest rates increase.
  • Could interest rates improve? One could argue that point of view too. If the downgrade has a negative impact on stocks, money typically flows from stocks into bonds. That helps increase bond prices, and causes interest rates to improve. Of course, this could also be a situation where both bonds and stocks suffer from the events of Friday afternoon.
For now, the markets are down… shut down for the weekend. We won’t know anything for sure until they come back online this Monday morning. Guess we will have to wait and see what happens. It could be a bumpy ride. In the immortal words of Samuel L Jackson in Jurassic Park…

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One Response to “Downgraded. Now what?”

  1. eracork Says:

    The video clip certainly embodies the world economy right now!

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