By John W. Schoen Senior Producer

This being the start of the year, a lot of Answer Desk readers are wondering what kind of year it will be. Mike is trying to figure out whether mortgage rates are headed higher or lower. So, once and for all, check out the Official Answer Desk Interest Rate Forecast. (Hint: clip, save and keep it handy. It's good for the rest of your life.)

What will mortgage interest rates be for next year?
Mike, Address withheld

This is the time of year the financial press is loaded with predictions about where the economic and financial markets are headed for the coming year. You can choose from a wide array of pronouncements from some of the best minds in the business, confidently served up to help you plot your personal financial course for the next 12 months. So here’s an answer you probably won’t see among all those sage forecasts on where interest rates are headed.

Our answer is: no one knows. If they say they do, they're lying. You might as well ask what the temperature will be in Central Park on Aug. 23 at 5:36 p.m. But if you want to play along at home, while watching interest rate “experts” expound on the subject, here are a few things to consider:

In order to predict where long-term mortgage interest rates are headed (or even the short-term lending rates set by Federal Reserve decree), you need to make several other, fairly dicey predictions first. For starters: will global demand remain strong for mortgage debt – and all the other paper like U.S. Treasuries, corporate and municipal bonds, etc. -- churned out by anyone and everyone who wants to borrow money? (When you get a mortgage, your loan is often quickly sold off to these investors to free up more cash to lend to the next borrower.)

So far, the world’s savers (who ultimately generate all this cash) have been happy to buy up this paper at historically low rates of return. But these buyers – everyone from pension funds to foreign governments to individual investors – could begin to lose their appetite. Maybe they’ve bought all the paper they need for awhile. Or maybe they start to wonder, how they heck are debt-gorged consumers – not to mention Uncle Sam -- ever going to pay all this money back? If that happens, these bond buyers could begin to demand a bigger payoff before parting with their hard-earned cash. That higher payoff means higher interest rates on all this debt.

Then, while you’ve got your crystal ball powered up, ask it where inflation is headed -– a question that is currently subject to a number of differing “expert” opinions. Some economic gurus suggest that the recent surge in energy prices will inevitably spill over into higher inflation, much as the oil shocks of the 1970s sent prices of everything soaring. Others argue that (for a variety of reasons, including the fact that the U.S. economy uses about half as much energy per unit of GDP as it did 30 years ago), inflation won’t be a problem. (Your guess is as good as the best-paid economic analyst.)

To make your mortgage rate prediction, you need to know the inflation rate for 2006 because interest rates and inflation tend to move in the same direction. The reason is pretty simple. If inflation rises, that means a dollar of savings at the start of 2006 has less buying power by the end of the year. So if those bond buyers (again, the folks who ultimately supply the money for your mortgage) see inflation rising, they’re going to want more interest to make up for the loss in buying power of their dollars. In the 1970s, the worst part of the inflationary cycle pushed mortgage rates above 18 percent.

It would also help armchair rate forecasters to know which way the dollar was headed over the next 12 months compared to other currencies. A lot of the cash that is soaked up by the bond market comes from overseas -– so a drop in the dollar eats away at savings that start out in another currency. To make up for the money they’ll lose from a drop in the dollar’s buying power when they bring their savings back home, those savers will demand higher interest rates, too.

So let us know when you’ve got those questions figured out. If you do, we’re wondering if you could help us pick the numbers for our next Lottery ticket.

Are these people that send you e-mail about how start your own business sometimes legit or a scam? I have this gentleman … who offered me to start my own business, yet said it'll take anywhere from $0 - $99 just to start. I know you need to spend money to make money, but doesn't it cost more or less? How should I go about the approach? All advice would help with my decision, and I'm a very educated, and self-motivated individual. So I'm really considering his offer.
Andre Phoenix, Ariz.

It’s very difficult to generalize about people who pitch consulting services like this. There are certainly legitimate advisors who advertise their services. But, in general, ask yourself this: if this guy is legit, why is he cold-calling me directly? Another way of saying: if a product really did what it said it did, why would the people who sell it need to spam you with email or try to sell it over the phone?

For $100, it’s hard to see how you could “start a business” -- that probably wouldn’t cover the legal fees for setting it up. Though many people can (and do) start on a shoestring, you’ll need to raise at least some money to finance your business until the money starts rolling in. (And underfunding is one of the biggest reasons new businesses fail.)

So before you go any further, ask this fellow: what, exactly, am I going to get for my money?

It seems to me that taking oil out of the ground must have some adverse effect on the earth. What happens underground when oil is removed? What's the effect on the future of the earth?
Jim B.,Fort Atkinson, Wisc.

The major impact is on the atmosphere from the burning of all that oil. Next to that, all other impacts are minor. Of course, there are other environmental hazards – mainly when the oil doesn't get where it's supposed to go -- either from pipeline breaks, or tanker spills, etc.

It is also true that when extracting oil from the ground, water (or unused natural gas) is often pumped back in to the underground reservoir to maintain pressure to force the oil to the surface. In areas where water is scarce, that's a resource that can't be used for other purposes like drinking or irrigating crops.

But just removing oil from the ground is much less destructive than, say, an earthquake. It's what we do with the oil that causes the most harmful effects on the earth.

I was shocked when the oil industry was given large tax breaks at a time when this industry is earning record profits. I was told that the purpose of the tax breaks was an incentive for the oil industry to find alternative energy sources. I am having trouble with this making sense. Would you shed some light on this paradox?
William C.Sanford, NC

It's called lobbying. In the U.S., we have the best Congress money can buy .

There were incentives added to the Energy Policy Act of 2005 to encourage development of alternative energy sources -- not just by oil companies. Most of the law – and the White House’s energy policy – is devoted to encouraging the production of more oil. But, despite the emphasis on new production, there is little in the bill to require oil companies to spend more of their profits to find and develop new sources of fossil fuels.

In fact, oil production by major independent oil companies is declining, as existing fields slowly dry up and newer fields are harder and harder to find. So even if the intent of the tax breaks –boosting oil production – was a good thing, it hasn’t had the desired effect.


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