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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.  

Posted by Gregg Mower on March 10th, 2020 2:18 PM

The Federal Reserve has raised the Federal Funds rate by 50 basis points or .5% last year 2016, so what does this mean?  Although the Federal Reserve does not control interest rates on homes, it does control interest rates that banks lend to each other called the Fed Funds Rate.  During the same period interest rates on home loans rose by 50 basis points as well.    The policy of the Federal Reserve Bank has been to use interest rates to quell inflation.  This policy started back in the mid 1980’s with Paul Volker as Fed Chairman.  The concept or policy is that if the Central Bank (the Federal Reserve Bank) senses that inflation is threatening the economy interest rates are raised to slow the flow of money thus keeping inflation at bay.  This has been the Fed’s policy and it has been working, for the most part for the last 30+ years.   The question should be asked if this should be continued or modified as our economy has gone more global than ever before and coupled with a National debt over 20 trillion dollars, does this policy still work for the American economy?

Let’s first look at what the effects of higher interest rates are in the American economy and then what it presents to a worldwide economy.  In America in a higher interest rate environment it becomes less desirable for large projects to start as the higher cost of the money will have impacted the profitability of the project.  For example; if a large development project is evaluating the costs to build and what the profit margin is going to be at the end of the project the cost of the money to complete the project will directly effect profitability.  I addition, if they are going to borrow money at say 6% and the interest rates rise to 6.5% on a $100 million financed the difference in annual payments would be $500,000 a year.  As you can see this dramatically impacts the profitability of the project.    So, in theory, less projects will start in a higher interest rate environment thus less employment and less money flowing into the economy to push prices on goods and services higher.  So, what you get is a general slowing of the economy under this theory that has been used by the Fed for the last 30+ years.  What higher interest rates do to potential home buyers is cut the buying power for potential home buyers.  With a .5% rise in interest rates the buying power of a home buyer will decrease by $30,000 on the average.  So, with the new interest rate being .5% higher a potential home buyer will qualify for $30,000 less of a home.   This combined with slower job growth from large projects not starting will slow the economy thus inflation. 

Now what happens worldwide when America raises interest rates?  This is the part of the equation that I believe has not been fully evaluated by the Federal Reserve system.  It used to be if America raised rates other countries would follow thus keeping the dollar on par with other currencies around the world.  Also, our debt was believed to be under control back then so other countries would just follow America’s lead.   What has happened, and has not really been taken into consideration from our central banking system, is that more outside countries hold our debt and more outside countries have joined the European Economic Union, that did not exist in the 1980’s and some important countries have now left that as well.  China has become a superpower as well.   All the while, in America, our basic concepts of raising and lowering interest rates to the effects of our economic numbers has remained the same.  My question to the Federal Reserve would be why have you not changed with the times? 

With my degree in economics I have used these concepts to anticipate interest rate movements for the last 30+ years and I have been pretty accurate over the last 30+ years in doing so just from knowing these basic economic policies of the FED.    I have also observed over the years that the numbers that the Fed uses to predict inflation have become more abstract than ever before.  The Federal Unemployment number has been the bench mark for the Fed's analysis of interest rates and when to raise them.    The unemployment rates, traditionally, show the percentage of people that are collecting Federal unemployment.  The theory has been that if unemployment is low, under 6%, then America has been deemed to be in a healthy economy with a higher probability of inflation.  Remembering that the concept of inflation is that if people are making more money they are spending more money thus putting upward pressure on prices of goods and services or inflation.  The Fed has consistently used the unemployment number as a barometer of future inflation.   Problem is that since our recession of 2008-2011 these numbers have not been accurate and the actual term or length of unemployment benefits that an out of work worker can get has gone up to 99 weeks from 26 weeks.  What we have seen that, since the recession is people have gone back to work but at a far less wage then they had prior to the recession.  This lowers the unemployment number but is not an accurate depiction of how that same worker may spend the wages they are now receiving.  We have also seen a shift in family dynamics with one spouse staying home with children to combat the high costs of day care, thus taking that person out of the unemployment number entirely.  So, although we have seen a significant decrease in the unemployment number we have not seen family incomes rise to the pre-recession levels and we have not seen the kind of inflation that should happen under a full employment economy. 

With a rise in interest rates over the last few months we have seen the refinance market slow to levels that were pre-recession.  It appears that most people have been able to refinance to the lower interest over the last 6 or seven years so the demand to continue to refinance has diminished.    With higher interest rates it has become less attractive to refinance.  One of the consequences of the higher interest rates is that the flow of income slows to the lending industry and will eventually lead to layoffs in the mortgage industry as it has been a strong market for so long that lenders have staffed to fill the old refinance volume needs and now with less volume they don’t need the staff.  These folks will increase the unemployment number by May or June of this year as there is always a time lag when there are changes in the economy, hopefully the Fed does not do another increase in the meantime as that will lead to more layoffs.   Although rates have risen interest rates on home loans are still in the 4’s which is still great, so if you have not refinanced and your current rate is in the high 4’s or fives, or if you need to take cash out of your house to pay for bills or college there is still time to lock into a good interest rate. 

I am just scratching the surface with regards to the factors effecting interest rates and inflation in this article.  I am a believer that in a global economy and the changes that have taken place over the last 30+ years we should be looking at interest rates from a different set of rules.  Our Government has traditionally been reactive to changes in the economy as opposed to being proactive operating on a policy of ”it works until it doesn’t”.  The result is government intervention to fix it, which has never worked and just has put America further into debt and burdened with a larger government with more and more government agencies than ever before.  I don’t want to get political here but what has made America an economic superpower in the past was that people were free from government intervention to create new ideas and new products and services.  With this freedom came the knowledge that if you fail, big or small, no one including the government would bail you out.  This has changed radically with people looking to the government for solutions where they should be looking to themselves and realize that win or lose it is up to the individual to make things right, not government.  We need to become more self-reliant than a dependent society.   These factors also need to be factored into the Fed’s analysis of inflation and how to combat it.  

So if the current Federal Reserve policy is to use the unemployment number as the main factor in determining whether or not they should raise interest rates we will be heading into an economy where we will see higher volatility with interest rates and the economy as a whole.  With the Fed and Janet Yellen (Current Fed Chairperson) looking to raise interest rates again this year we will be looking to an economy that might be cooled off too much.  Some inflation in a healthy economy is not a bad thing so long as wages can keep up with it.  We can look too see home refinancing slowing down this year with the higher interest rates and hopefully home purchases don’t slow too much as that could put America right back into a recession.  It is a balancing act for the Fed to change rates as they really don’t know what  the end effects will be and if they have gone too far.   As always this is just an opinion of a guy who has been in the mortgage industry for 32+ years and if you wish to comment feel free and if you have not refinanced we would love to assist you with that at MAE Capital Real Estate and Loan.  You can call our offices directly at 916-672-6130 or email us at info@maecapital.com.  

Post Script 3/20/2017  The Federal Reserve (The Fed) raised the federal funds rate by .25% which was anticipated by the markets.  Since the Markets liked the only .25% increase the DOW Jones rose to new highs.   The important part of the announcement was that they would be monitoring the unemployment rate and inflation throughout the the year and if they see any increases in inflation and significant decreases in the unemployment number they would then raise rates again.  We can only hope the Fed doesn't raise rates anymore or it could significantly reduce the availability of housing and affordability.  Key indexes that you need to watch to see if there is any inflation; one the stock markets, as this will increase wealth of individuals and they may pull it out and use the funds to purchase other items that could cause inflation.  Watch the unemployment numbers and watch them per the season, as spring and summer should have seasonally lower unemployment but not too low where there is a higher demand for workers than there are workers to fill the demand,  I don't see that happening but that will cause inflation.  I see a steady healthy growth during the year if rates are not increased anymore.  

Posted by Gregg Mower on February 21st, 2017 1:35 PM

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