EZ Mortgage Monitor - May 20, 2019 -

EZ Mortgage Monitor – May 20, 2019

As we roll into the mid-point of the year, mortgage rates are back at the lower end of their last 12-month trading range.

Yet, I won’t be surprised if they trend lower as we roll through this year.  I don’t expect a huge shift, but I do think they’ll be incrementally lower.

Why?  There are a few things that drive my thinking, but the biggest one lately is that the trade war with China may be a long, protracted, and economically costly endeavor for both sides.  And, if the two largest economies in the world catch a cold, the rest of the world may get a flu, to recycle an old phrase.

And, speaking of old phrases, there’s an old Chinese saying, “That in war, one must prepare to lose 800 of their own to kill 1000 of the enemy” (Wang Xiangwei, South China Morning Post columnist July 14, 2018).

Additionally, although the US has more economic heft, China may have a unique advantage in a trade war, in that there’s little separation between public and private entities so they can subsidize companies and citizens alike, to ease the pain.  It’s part and parcel of their normal operating procedure (and a big part of why their trade practices are not entirely “free and fair” and why the US is now employing tariffs as a tactic).

On top of that, since Xi Jinping is now President for Life, he doesn’t have political considerations to contend with.  In fact, right now, Xi and his mouth pieces through the Chinese media are stoking their nationalist flames, trying to mobilize their populace to support China, and spurn the US, while preparing for a long fight.

Moreover, since there’s little separation between Chinese businesses and its government, they can apply undue pressure (read hassle factor) on US companies doing business there.  If you’re a fan of Monty Python, think of the skit when the mobsters harass the British Army.  Then there’s the whole “rare earth” materials market, which largely stem from China.

If both sides dig in, rather than looking for common ground and ways to ease the tension, this may be something that sticks with the world for more than just a few months.  It could very well be years.

In terms of economic impact, I found two analyses of the potential toll tariffs on Chinese goods and their retaliatory measures, if fully implemented, could take on the US economy.  The Tax Foundation (https://taxfoundation.org/trump-tariffs-income-impact/) a tax policy think tank, and Trade Partnership Worldwide (www.tradepartnership.com) a trade consultancy, seem to have taken the most in-depth and comprehensive look at the impact of the trade war with China.  The Tax Foundation projects that we could see a .75% drag on Gross Domestic Product, while Trade Partnership Worldwide projects a full 1%+ drag potential, if the proposed tariffs and China’s retaliatory measures go all-in.

If those estimates are correct, to quote Ross Perot, “you’ll hear a giant sucking sound” out of the US economy….  Interestingly, he used that phrase to disparage NAFTA…

The bottom line is that international trade is complicated and messy stuff.  Globalization has absolutely displaced US manufacturing workers.  And, China certainly works to tilt the scales in their favor in their trade practices.  But, globalization is also in large part what has kept the cost of most consumer goods down, too, while also improving economic realities for people across the globe.  Plus, we like our stuff, and we want it cheap.  Globalization facilitates that.

Ultimately, it’s possible that cooler heads prevail.  The economic impact could actually bring both parties back to the table to make a deal.  The trickier part of that is that for that to happen, I believe they’d have to create a structure that would allow both leaders to present a win to their respective countries.  This may be easier said than done.

According to a South China Morning Post story by Kinling Lo published on May 16, 2019, what killed the latest round of talks was that the Chinese delegation removed specific benchmarks outlining the obligations it was required to meet in order to lift existing, and avoid further sanctions.  Apparently from the Chinese side, they want all sanctions lifted immediately upon an agreement.

If accurate, and it does jive with the US Administrations claim that “China reneged” on their part of the deal, bridging that impasse may prove difficult.

China and Xi are already fighting who they perceive as the bully of the world, in this war.  And there’s no doubt, Xi would love to make China the world’s pre-eminent super power.  For Xi to acquiesce may not be the look of strength he’d like to portray.  And, Xi, knowing Donald Trump is almost fully into re-election mode, may try to ride out the next 18 months, hoping the economic pain in the US is enough to unseat the Trump Administration.

President Trump, on the other hand, believes trade wars can be won.  And, he feels that his “tough on China” talk and trade policy will help him get re-elected, despite potentially negative economic consequences.

There’s no doubt every US administration, basically since Nixon normalized relations, has had the same issues w/ China, their trade policies, and intellectual property theft.  So far, nobody has tried tariffs as a tactic.  We’ll see if it works.

If they come back to the table, and give the US the concessions and benchmarks towards achieving what we’re demanding, it may well prove worth it.  If not?  Then it’s possible nothing will have changed, other than slowing economic growth in the two largest economies of the world, just as a business cycle may have been set to turn downward anyway.

If that’s the case, trade relations may get worse, before they get better.  Meanwhile, the average American and Chinese will shoulder the burden.  That’s not good news economically, but, usually that is good for interest rates as money moves to the relative safety of US Treasuries, bonds and mortgage backed securities during economic downturns.

On the other hand, if a deal is made, even if it’s something that really just returns to the status quo, stocks would likely rally, at the expense of the fixed income markets.  If only I could see the future… Either way, It’ll be interesting to watch it all unfold.

In the meantime, if you, your family or friends are looking to buy or refinance and have questions about home mortgage rates, or any other real estate financing, I hope you won’t hesitate to reach out.

Here’s where rates started this week.



Conforming Rates Points APR Loan Amt Payment
30 yr fixed mortgage 4.000% 0 4.050%  $    300,000.00  $          1,432
15 yr fixed mortgage 3.625% 0 3.675%  $    300,000.00  $          2,163
5/1 ARM 3.625% 0 3.875%  $    300,000.00  $          1,368
10/1 ARM 4.125% 0 4.175%  $    300,000.00  $          1,454
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage 4.250% 0 4.280%  $    555,000.00  $          2,730
15 yr fixed mortgage 4.000% 0 4.030%  $    555,000.00  $          4,105
5/1 ARM 4.000% 0 4.030%  $    555,000.00  $          2,650
10/1 ARM 4.125% 0 4.155%  $    555,000.00  $          2,690
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 (760+ fico, owner occupied SFR with 75% loan to value ratio or less and $250,000+ loan amount), 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:eric@ezmortgages.us and add REMOVE to the subject line.  To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.
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