Vail Daily column: Global economics benefiting mortgage borrowers — kind of
The US and the global economy as a whole is facing a unique situation that, depending on your view point, is either the best of times of the worst of times, or a bit of both.
When the great recession of 2007-08 barreled down on us, the federal government responded, in part, by having the Federal Reserve Bank purchase about $4 trillion of long term debt, primarily mortgage backed securities. This tamped-down long-term rates for not only homebuyers but also for the government deficit and, I think even the most hawkish economists would have to at least grudgingly agree, kept things from getting a whole lot worse than they did.
However, the plan always was that in time the Federal Reserve would gradually stop their meddling and let the free markets set the rates and the pace of economic growth and presumably the rates would rise.
The Fed’s Options
The first part of the plan did and continues to happen. The Federal Reserve has slashed its purchases of long-term debt drastically and plans to be mostly out of buying bonds by mid-2015. Of course, it will still have a stash of about $4 trillion in bonds it will have to do something with (which actually will earn a pile of cash for the federal government as borrowers pay off the home mortgages the bonds funded).The Fed also has the option of selling the bonds to investors although likely at a loss but that would free up cash that the Fed borrowed from the Treasury and overall cut the U.S. deficit.
Not enough demand
But the second part of the equation, that long term rates should rise, isn’t working out as planned. The cost of money is, just like the price of pork bellies, determined by supply and demand. Right now, there is plenty of supply and moderate demand.
While the U.S. economy is showing many signs of recovery, things are not what they once were in terms of the consumers ability to buy goods and services. In spite of the best efforts of the 1 percent to spread their wealth around by paying $800 per day for a private ski lesson (of which, I am told, the ski instructor gets less than 10 percent of in most cases), the median household net worth in 2014 is about $81,000, which is down from about $115,000 in 2004. Add to that the fact that while the unemployment rate is improving (assuming one does not count the large number of people who have given up looking for work) many of jobs created pay far less than the jobs that were eliminated when unemployment was rising. Long story short, consumers just can’t buy goods and services like they used to.
This has kept the world economy weak and growth flat to nonexistent in most of the global economy. Other governments have tried to keep rates low as well but it has not stimulated growth because (in my opinion) they have done little to stimulate job growth or increase wages.
Currently, the 10-year U.S. T-Bill is paying holders about 2.8 percent while the German equivalent is paying about .80 percent return. The Japanese equivalent is paying .5 percent return. What this means is that globally investors and huge institutions are more than happy to park their cash in the U.S. T-Bills and make, for example six times the return they would make in Japan.
U.S. Debt better than Europe’s debt
If you recall a few years ago the buzz was that China basically owned America via its purchase of U.S. T-Bills (which raised cash for the treasury to lend to the Federal Reserve Bank to buy long term debt). Lately however, economists are noting that investors in Europe are snatching up U.S. debt because it pays better than Japanese or German debt.
This influx of foreign cash is likely to thwart the Feds efforts to increase rates in the US. This could mean a somewhat prolonged period of cheap credit for the US, which is the best of the story. The worst of the story is the world’s cash is still being invested in bonds versus building factories and creating jobs, which pay the 99 percent to buy real estate and invest or save, which is how household net worth is created.
Chris Neuswanger is a loan originator at 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.