Vail Daily column: Election results impact on mortgage rates remains unclear
Most people know mortgage rates go up and down a lot, but few understand the reasoning behind why they do. The answer is that there are dozens of factors out there influencing the global economy, and they all trickle down to the cost of money. When people, institutions, big corporations and individuals decide what to do with their cash they always weigh two things: Return on their money and the likelihood of return of their money. Ideally, everyone would like the best of both worlds, a high return and very low risk but it always seems to be one has to win out. Return of the money is more often than not the deciding factor.
When obligations, such as mortgage backed securities, are guaranteed by the U.S. government, or at least implicitly guaranteed if not clearly guaranteed in writing, there is very little perceived risk and as a result offer a lower return. In times of uncertainty investors flock to low-risk investments regardless of the fairly low rate they pay on returns.
And markets (and investors fears) can be roiled by terror threats, corporate earnings reports, nasty rumors and vicious lies as well as upcoming the perceived economic policy of the U.S. government in terms of stimulating economic growth.
On Tuesday of this week, the game changed and nobody quite knows what the new rules will be. Congress plays a huge role in economic strategy and it remains to be seen how the Republicans will handle their newfound power.
One hopeful theory out there is that the Republicans can’t do much worse than the Democrats have been doing, and at the very least there might be some relief to the complete dysfunction of Congress and their inability to do much of anything. Indeed, it seems that the House and Senate could argue the day away trying to decide if they could not agree on much of anything or not.
Wait and See?
The mortgage markets have so far this week taken the change in stride with not much changing as far as investors appetite for low risk investments. The question is whether this is a wait and see situation or do investors see that Congress is still broken and the next session will be more of the same gridlock and dissension. Are they just going about their business the same way they have for the last several years? (That being keep your head down and stay away from much risk.)
If come the new year and it appears that Congress is functioning and turning out some real economic stimulus, then we can expect an exodus of money from the mortgage-backed securities markets and a transfer of wealth to other investment opportunities. Those raising money for funding mortgages will have to offer a higher rate of return to keep the cash coming in. The short translation of that mouthful is: Higher mortgage rates.
The other factors impacting rates and investment in mortgage securities include the price of oil, which historically has been a good thing for the economy when it drops because in the past we were importing the majority of our supply and the impact was felt though lower energy prices and lower raw goods costs (oil is an ingredient in millions of consumer products). This meant a better balance of trade and more money in consumers’ pockets to go spend on more consumer goods and services.
Change in Balance
But that balance has changed with the oil production boom in the U.S. Higher oil prices mean more oil drilling and more jobs in the oil industry. Lower oil prices could cut economic activity in that sector and derail other growth opportunities. A drop in oil prices is now about as welcome in many regions as a drop in condo prices is welcomed in Eagle County.
Terrorist activity (or perceived threats) make investors nervous as well. The combo of possible lower activity due to low oil prices and possible terrorist activity could depress the economy and keep cash flowing into relatively safe mortgage securities.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His website and blog are at http://www.mtnmortgageguy.com.