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Vail Daily column: European drama hits US mortgage rates

As the world economy keeps inching upwards to recovery, there will be some dramatic moments as economic recovery programs start to wind down, and while the U.S. will keep slow and steady as its plan, other countries may make rash movements that can send shockwaves through the global financial exchanges.

One situation came to a head this week in Europe as the head of the European Central Bank President Mario Draghi announced, kind of, that it would probably accelerate the wind down of its bond buying program. You can bet every TV on Wall Street was tuned in to every word of his speech.

More specifically, Draghi indicated the world should get used to wild swings in the bond markets, which probably means the European Central Bank will not step in and meter out money to calm the waters.



Keeping Things Stable

For the past few years, when dramatic economic news (be it good or bad) came up that might have caused large swings in the bond markets, the European Central Bank and the Federal Reserve have weighed in and either bought or sold to keep things stable. This made bonds all around the world a safe bet for trillions of dollars in capital, and kept rates on mortgages and other financial products low and somewhat stable.



Now, lacking such assurances bonds may not be that safe a deal after all, and there was a frenzied flight of capital out of bonds within minutes of his speech. Prices for government bonds of both the U.S. and the European nations plummeted as investors ran for the door and yields, which are inverse of prices surged.

Along with that mortgage rates surged as well, going up well over a quarter point or more, leaving a typical 30-year fixed loan in the low 4 percent range.

Many analysts attribute the violent swings in the markets to the highly computerized trading methods almost all traders use. The days of watching for a trend and buying or selling a stock or bond are long gone.



Snowball Effect

Traders today use computer algorithms to spot trends and have triggers set to buy and sell within micro-seconds. This can create a snowball effect (or in some case a full blown supersonic avalanche effect) where with no human action required, markets can swing violently within minutes.

It doesn’t make any difference if the news is really all that good or all that bad. If it’s enough to move something a penny, then the next guys computer will spot it and either buy or sell accordingly, and the next guys computer will top that move and when there are thousands of such transactions going on simultaneously around the globe, it gets pretty intense as markets can move hugely before anyone has a clue what is causing it.

But the good news is that mortgage rates are still very affordable, and near the bottom of the range they have been in over the last 50 years. While rates are a full point below where they bottomed out at they are still half of what they were for most of the last 20 years. If a mortgage rate in the low four percent concerns you, then talk to someone over 50 and get their viewpoint. I recall when we had a celebration in the office when rates went under 7 percent many years ago.

Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com


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