Here is a topic I have not visited in while but feel it is time again to address what is going on with mortgage rates. The stock market has taken some serious hits over the last few days due to concerns with the Coronavirus and that has put downward pressure on the US Treasuries and the bond markets. Why you ask? I will get into the details of why later on but know that when there are panics in the Stock markets money tends to flow towards safe and secure investments while the markets are gyrating like bonds. Some of the reasons the Stock Markets have corrected downward is over fear of the Coronavirus and the price wars going on now with oil prices after Russia pulled out of OPEC. So there are a lot of economic new stories right now driving the markets.
Let’s talk about the effects of the Coronavirus and why it is driving the Stock Markets down around the world. But first you have to understand what stocks are. Stocks are shares of large companies that are sold to the public so the company can remain capitalized (i.e. have enough ready capital, money) to build and expand their business. People who buy and sell stocks tend to look for companies that will have good growth into the future to buy so the hope is the value of the stock will grow with the company. Investors in stocks will tend to sell their stock in a company if they foresee a potential down-turn in the company’s profits. That said with this threat of Corona virus in the public it is believed that people will not buy or do normal activities if they can not go out into the public, thus not spending money on goods and services they would normally have spent their money.
Now that you understand how the markets work in a basic form you now can see why the markets have been selling off. But how does that affect the interest rates you ask? Well this is where is gets interesting so follow along closely as I am about to open a door into a reality that few actually see or know about and that is economics. As we have seen the Stock markets selling off due to the potential earnings loss of companies due to lack of demand (people not buying goods and services), investors in the Stock Markets have been looking for a relatively safe place to park their client’s money during this correction. The place is the Bond Markets where fund managers and Stockbrokers park funds while Stocks settle down. Specifically, the United States Treasury Bonds are the specific bonds that are purchased. This is where it gets really interesting so hold on to your hat. Not only do Stockbrokers and Money managers park their funds in U.S. Treasuries, the Mortgage industry uses the 10 year Treasury Bond to hedge their bet on interest rates.
Hedging defined is buying or selling an investment to reduce the risk of an adverse price movement of another investment, kind of like an insurance policy. In other words, the folks that sell mortgages will buy U.S. Treasuries to offset the possible movements in the interest rates. The concept of hedging is important to know because the interest rates are being driven by this right now. As the Stock market continues to correct and Treasuries are being pushed to their lowest levels in the history of the Treasury market, so what does this have to do with long-term interest rates?. Although this does not directly affect interest rates it does take a way the hedge vehicle for mortgage bankers. In response to that when interest rates should be declining, they have actually raised. That’s right interest rates have gone up over the last few days as the Stock Markets declined the Bond Markets rallied but longer term interest rates have actually gone up.
The Federal Reserve saw this affect happening and decided to lower the rate they can control to try to stimulate the markets with low interest rates. You have to understand that the Federal Reserve does not control long term interest rates, the only rate they control is the Fed Funds rate. The Federal Funds Rate is that rate in which Banks can borrow from the Federal Reserve. The rub is that banks don’t need to go to the well for money in a strong economy to borrow money. So, there is little to no effect on long term mortgage rates with the Federal Reserve or “Fed” lowering their rate.
On another front is oil prices and their effect on long term interest rates. With Vladimir Putin pulling out of OPEC ( the largest oil cartel on the planet who sets oil prices around the world) and OPEC responding by lowering crude oil prices to as low as $31 a barrel creating essentially a war over the control of oil prices. This has a very adverse effect on American oil production as when oil prices dip to these kind of lows American oil companies cannot produce oil at that low of a price it will become more beneficial to import oil at the lower prices and hurting American oil producers and the workers that produce the oil. There are now worries over American oil producers filing bankruptcy. This now will impact American workers and those that support that industry like steel, heavy machines, plastics and so no, then the effects trickle down the towns in which those workers live and those companies that support those towns. This will inevitably turn up in our unemployment numbers signaling a slow down in the overall economy. This affects the Stock markets in the same ways as mentioned above.
There is a bunch of things happening to where the Stock Markets and the Bond Markets have been reacting crazy. This is a very unique time in our economy to watch what is going on as it is truly historic and has been going against everything we know and seen over time. There is a component that I have not mentioned here that is hurting the overall economy in ways it has no idea and that is the media. The media has been blowing this virus out of proportion to the point that people are panicking and running scared. I do not profess to know anything about this outbreak nor do I profess to be any kind of medical professional but what I do know is numbers and when you see the differences between the deaths by Coronavirus versus the regular Flu there is no comparison far more people have died year to date over the Flu, so it stands reason that there is a abnormal hysteria going on out there. I am not trying to discount how terrible this virus is, but I can’t buy into the hysteria.
So, if you are wondering and scratching your head as to why interest rates have not done what the media is implying this is why. Interest Rates are great I am not going to discount that and yes I love the attention we are getting from the media that interest rates are at historic lows it has been great for business, but don’t get set on getting a long-term mortgage in the 2’s without paying greatly for it. My team is ready and waiting for your calls to go over your existing mortgage and see if now a great time to refinance. We can refinance your mortgage without resetting the term which is a huge help with the over all interest you would pay on a mortgage over time. For example, you took your existing loan out 2 years ago and have 27.5 years left on your existing loan and you don't want to lose those years you have already paid. How about a refinance that would be a 27 year loan as to not take away the time you have already paid, we are doing this all the time. For more information on refinancing your home or investment property give us a call today and we will tell you the truth about Refinancing and give you the best interest rates from Banks across this great nation. 916-672-6130 and download our app for free.