Vail Daily column: Chinese troubles open window for US homeowners
August 14, 2015
As many homeowners have noticed recently, mortgage rates are down, in some cases to the high 3 to low 4 percent range (depending on what you want to spend on closing costs). Many wonder what's up and why this is happening and will it continue.
The answer, as it has been so often the last several years, has to do with world economic events, and in this case it's China's turn to mix things up.
As some know, China's stock market has slid as much as 40 percent in the last few months, and on top of that Chinese exports have declined 8.3 percent last month. That's a lot of cell phones, TV sets and other consumer goods, and that means production cut backs and subsequent job cuts will likely follow. Rising unemployment would be bad for China as there things happen on a much grander scale than the US as China has more than 1.3 billion citizens compared the US with about 320 million. A percent uptick in unemployment in China places a very large burden on the government, and they want to avoid any disruption to their self made image of a perfect workers utopia.
Devalue the Yuan
One of the tools the Chinese have to make exports grow is to devalue their currency, the yuan. This makes their exports cheaper and presumably might increase demand. Let's just say sometime this works and sometimes it doesn't. But when faced with the stock market crisis combined with decreased exports (which would hurt corporate earnings further) the Chinese pulled the stops out and devalued their currency this week.
This action is a double edged sword, in that while it might help business and keep the lid on unemployment it also devalues the holdings of foreign investors if they try to cash out and pull money out of China. Some speculate that this move is part of the strategy to keep capital in China and prop up the stock markets, and to a degree that might help. But investors are also on high alert and being reminded that diversity is a key factor to a successful portfolio strategy. As a result, the U.S. is looking pretty good to investors lately, and there has been a significant flight of capital out of Beijing to our shores.
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This has caused the bond market, and the supply of capital available to the U.S. to surge in the last few weeks and forced yields and mortgage rates lower. This has come as an unexpected boost to homeowners and homebuyers making mortgages more affordable than they have in several months. This is also diluting the impact of the Federal Reserve Board's reduced investment in the bond markets.
But tread cautiously if you think this drop in rates is going to last. The market can turn on a dime and good news out of China could come any time, meaning thing could reverse.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.
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