Mortgage Rates are Tanking, and Why It’s Important to You

Not since late in 2012 have mortgage rates been this low. The month of April saw rates plummet to 3.31 percent. This is great news for homebuyers and refinancers, but it’s showing the reflection of the global economy.

What’s going on?

The rates are this low today due to the Fed halting its purchases of mortgage-backed securities and treasuries. Prior 2012, the Fed was buying as many as they could get to force rates lower. Today they aren’t buying any and are primarily working on trying to undo the near-zero interest rate policies that were installed after the financial crisis. This is quite a different conundrum than the aftermath of the financial crisis.

  Because the Fed isn’t driving down rates with their buying power, it’s unlikely rates can, or will fall much lower. When they were on a buying roll in 2012 they were systematically able to raise prices, and lower yields. They may start buying again, which could make this historic low only temporary.

The 10-year treasury yield, a common omen for changes in mortgage rates, has held that the theory as rates moved lower. Twice in April the 10-year has seen its lows from 2012 and both times the market shot its yields up higher. IF the 210-year sank below its 2012 numbers then the mortgage rates would likely follow.

It’s not the Fed, so why are rates dropping

The Fed has little skin in the game at this point, so they’re not tipping the scales of supply and demand, so how could rates drop even more? It would take a global event to send rates even lower than they already are.

If such a chance there is a global event the markets would most likely price in the odds that central banks would increase the easy money policies due to the slowdown. The same rates towards the direction they went in 2012.

This event may look something like the labor market deteriorating, along with the GDP. It could possibly be china, much like the scare in August of 2015, and January of 2016. In the china case, rates dropped quickly from the fear that rippled through the country.

The United Kingdom could also leave the European Union, which is actually scheduled for a vote on June 23. It’s expected that rates fall if they do decide to leave, and there would most likely be negative economic repercussions which would have a ripple effect on the United States.

Investors Expectations

The best way to tell what is to come is look at what happened last time, and take into account the difference in economics and how that could change the outcome.

After the financial crisis low interest rates encouraged a refinancing boom the help the banks around the country. The big mortgage lenders used the fees and loan volume to counter weaknesses in commercial real estate legacy mortgage assets, and tumultuous trading in the market. It also was there to help pay the billions in fines and settlements for the misconduct that spurred the crisis.

On the other hand builders suffered during the refinancing boom, the rates were low and weren’t selling homes. The low rates today should help bolster real estate activity and lending much like 2012. This activity though is much more stable than what was happening last time. Home purchases today are driving the market, instead of refinances. It’s not by chance home price increases have coincided with the decreased share of refinancing.

For the lending banks, today’s rates could be twice as potent towards their consumer and home loan businesses  that push purchase money and refinancing loans higher at the same time. Wells Fargo is a notable lender, surviving primarily on its mortgage business; it was the only bank to increase its revenues in the first quarter.

The economic market data states that mortgage applications are up 13% this time last year. Housing starts are up 31% over the same period, along with 18% increases in both completed homes and under construction homes.

Builders are expecting to see improvements as well, even if the stock market won’t see the potential. Builders are seeing signs that reflect growth in their sector, and momentum is on their side.

If some unknown event does happen to create major economic problems and scare the market, the volatility would be a reasonable buying opportunity for the stock of a lender or builder that would benefit from the low rates, driving new sales in the domestic real estate market in the U.S. As always, don’t panic, and stay calm and watch the stock market, choose good quality companies, and wait for the market to offer you a chance to buy a steal of a house!

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