Where do we go from here, economically speaking? It’s begun to be a boring question, because we’ve been here so long.
We’re almost nine years removed from the last time the Federal Open Market Committee (FOMC) raised the target Federal Funds rate at their June 29, 2006 meeting. The Fed Funds rate sat at 5.25% at that time. It’s currently at .25%.
Although we know that neither the Federal Funds rate, nor US Treasury yields directly impact mortgage rates, they’re loosely linked as varying yields for different securities where investors can choose to park their funds.
We know rates have never been lower than during the last two or three years, with the bottom set between about October 2012 and May, 2013. Then, in May and June 2013, when then Fed Chair Ben Bernanke reminded the world that “at some point, we have to start normalizing monetary policy” rates spiked by about 1%. Since then? They’ve done nothing but gradually drift lower, back to within striking distance of the low point set from late 2012 through spring 2013.
Now, as Fed Chair Janet Yellen and the members of the FOMC grapple with the timing to begin that normalization process in the US, pretty much the rest of the world – at least the parts that matter most, economically speaking – are embarking on their own Quantitative Easing programs, namely Japan, and just this month the European Union.
What’s that going to do to yields on US Treasuries and Mortgage Backed securities?
If 10-year German Bunds, considered one of the safest places to park funds on the planet, next to 10-yr US Treasuries, are paying .15% (yes, that’s .15% not a typo for 1.5%) who really wants to hold that, when you can go into a 10-yr US Treasury and get 1.9%?
And, if 1.9% on a 10yr US Treasury doesn’t sound too good? Well, why not look at a Mortgage Backed Security? After all, home values have stabilized, underwriting standards are more focused on a borrower’s ability to repay, and in general, the risk isn’t “that” great, and, you can go get 3.5% to 4% yield? That doesn’t sound too bad, relatively speaking.
That’s sort of a simplistic overview of at least one dynamic that could keep our mortgage rates low, for a bit longer.
That could remain true, even as the Fed begins to raise interest rates, whether that process begins later this year, or early next, simply by shifting the supply/demand curve.
During the height of the crisis, the Fed stepped in as the buyer of last resort. They were the market for Mortgage Backed Securities, and US Treasuries.
That’s now shifting. So, it’s conceivable, that if recent history is any guide, knowing that past events are not necessarily predictive of future results, if the EU is on a two, three or four-year quantitative easing program, will their markets for bonds and equities mirror ours over the last few years? Quite possibly.
So, if investors are left to choose between buying German Bunds paying a paltry fraction of one percent, or maybe slide over into US Treasuries and/or Mortgage Backed Securities, paying significantly more, will they?
Could that demand help keep yields low, even as the Fed begins normalizing monetary policy here in the US?
Keep in mind that even a Federal Funds Rate of 2%, which could still be a year or three from being seen, is still very, very accommodating. It’s just moved off the floor of ridiculously accommodating.
Further, it’s conceivable that due to that supply/demand dynamic, as the Fed’s holdings of Treasuries and Mortgage Backed Securities roll over, rather than freeing up too much liquidity into the system that some fear could drive inflation higher than we’d like, maybe the demand for relatively safe securities with “relatively decent” yields, in this ongoing low yield environment will make a perfect parking spot for what may otherwise be excess liquidity?
If that played out, maybe we’d enjoy (well, those of us looking to borrow cheap money, would enjoy) another year or three of these still silly low mortgage rates. I guess it could happen.
On the other hand, what if the Fed has it wrong?
What if they’re behind the inflationary curve already? After all, unemployment is back down to 5.5% here in the US, which is pretty close to what’s considered full employment (and may be full employment when accounting for the retiring Baby Boomers). Sure, the March jobs report was a bit soft, but that’s one weak spot in a long line of strong job creating months.
Moreover, we’ve seen that certain segments of the labor force for skilled workers have had pricing power for some time now, where they can demand and get raises, or quit one job to move to another, better paying job.
Major employers like WalMart and McDonalds are now increasing their base level wages, too.
Typically, wage gains lag a tightening job market. First, employers squeeze what they can out of who they already have. Then, they begin hiring, which is what we’ve seen over the last year or two. And finally, they begin paying more to retain the good people they’ve got rather than lose them to another company.
Could we see wage-based inflationary pressures begin to mount? Sure. It’s possible.
What does the Fed do then? Accelerate their normalization process by speeding up rate hikes to manage inflationary pressures? How might that impact the blossoming recovery?
I don’t have the answers to these questions.
All I know, with certainty, is that it’s unlikely we’re going to live in a world with 30 year fixed mortgage rates in the high 3%s and low 4%s forever. In fact, I thought those days were gone, back in June 2013. I was proven wrong then. I’ll “probably” be proven wrong again, about something… I’m sure of that.
And, for a lot of people who were crushed by the meltdown, who may have had to endure a short sale, loan modification or foreclosure, they’re hopefully now starting to get back on their feet.
It can be a fresh start, of sorts, with a clean slate, and new perspective. Rates are still low, home prices should level out and remain relatively affordable, and there are opportunities to get back into the homeownership market if that’s what’s important for them (there are lenders who’ll finance you a day after a foreclosure, if you’re willing to accept their terms, FHA requires only 3yrs, or only 1yr through their Back To Work Program, and with FHA’s reduction to MI and 30 year fixed rates in the 3.375% range, that can be a great option).
For others? They’ve realized there’s value in renting. Homeownership is more than just paying your mortgage, taxes and insurance. Homes are cost centers that depreciate over time, and appreciation can be fickle. When you’re renting, it’s not your cost center. There can be freedom in that, for sure.
As with most things, there is no “one size fits all” answer. It’s a matter of assessing your situation, knowing where you want to go, and how you want to get there.
If that involves financing of real estate, I always hope for, and appreciate your consideration. It’s what I do. Every day. Help you assess your situation, and outline the options that will best meet your goals.
Again, we know this era of low rates can’t last forever. At least we think we know that… So, enjoy ‘em while we got ‘em!
In the meantime, here are your rates ending this week. Please don’t hesitate to call or email if you, your friends, or family have questions about buying or refinancing residential or commercial real estate.
|30 yr fixed mortgage||3.625%||0||3.675%||$ 300,000.00||$ 1,368|
|15 yr fixed mortgage||2.875%||0||2.925%||$ 300,000.00||$ 2,054|
|3/1 ARM||3.250%||0||3.300%||$ 300,000.00||$ 1,306|
|5/1 ARM||2.875%||0||2.925%||$ 300,000.00||$ 1,245|
|Jumbo (ask me about Super Conforming limit, per your zip code)|
|30 yr fixed mortgage||4.125%||0||4.155%||$ 550,000.00||$ 2,666|
|15 yr fixed mortgage||4.000%||0||4.030%||$ 550,000.00||$ 4,068|
|3/1 ARM||3.375%||0||3.405%||$ 550,000.00||$ 2,432|
|5/1 ARM||3.125%||0||3.155%||$ 550,000.00||$ 2,356|
|Rates subject to change without notice.|
|Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (740+ fico, owner occupied SFR with 75% loan to value ratio or less), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:firstname.lastname@example.org and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.|
EZ Mortgages, Inc.
4535 Missouri Flat Rd. Ste. 2E
Placerville, CA 95667