Vail Daily column: Global indicators point to low rates
If you dread taking tests, here’s a question I hope you never get asked: What makes mortgage rates fluctuate? If ever there was a trick question, this would be one of them.
As to how to answer the above question, let’s just say pretty much everything from global politics (and more importantly, uncertainty about global politics) to the price of oil to the price of food to a love triangle can jolt interest rates up or down. Probably the price of tea in China factors in somewhere.
I once predicted that Bill Clinton’s affair with Monica would lower mortgage rates, and indirectly, it did because the economy actually liked the Clinton years and when faced with prospect of Bill actually being impeached created a degree of economic uncertainty and roiled the stock markets and caused bond prices to spike and mortgage rates to drop.
TRACKING INTEREST RATES
As keeping a pulse on the future of interest rates so that I can try and advise my clients on what to do about their mortgages is part of my job, I am always on the lookout for indicators as to what events are happening that might push the economic outlook for rates one way or the other.
Most recently though, there have been a number of situations I have noticed developing, which combined, seem to point to an extension of the low rates we have enjoyed the last several years.
The engine that drives interest rates up or down is the bond markets, as that is where the money comes from individual investors, institutions, funds and central banks around the world. In relation to mortgages, most mortgage money is raised by offering mortgage-backed securities. Bond markets are a bit like stock exchanges where traders buy and sell bonds instead of stocks.
BIDDING ON BONDS
Globally, about $100 trillion dollars passes through these marketplaces every year. Bonds finance everything from corporate expansion to new roundabouts to highways to schools and raising cash to lend out as mortgages. Bonds are rated on risk, and the best bonds are those that, at least in theory, are guaranteed by a local, state or national government. Every major country (and major corporation) issues bonds with the U.S., Germany and Japan being very major players. When the supply of buyers for bonds is greater than the amount of bonds being issued there is bidding for the bonds and the price to buy a bond increases. As the bond is set to pay a fixed return the buyer of the bond sees a lower return on his money.
DEMAND WILL EXCEED SUPPLY
Economists are now estimating that next year there will be buyers for about $400 billion more bonds than there are being sold. In essence, the demand will exceed supply, which will keep the price of bonds up and the yield low. Since 2007, JP Morgan estimates that demand has exceeded supply by about $2.5 trillion. Remember, low yield equals low rates to borrowers.
As for oil’s impact, the current low price of oil will impact the economy on both sides. It will likely curb jobs connected with new drilling and production facilities as oil companies can just let the oil sit in the ground until the next time oil prices spike. Those who invest in oil related stocks might just pull their cash out of the markets though and invest in bonds.
Lower oil prices may create some new jobs because consumers will be driving more and spending more on travel and new cars. Home heating costs should drop, putting more cash in consumers’ pockets. Lower oil prices also ease inflationary pressures, and could actually lead to deflation, which would not be good — an economy needs a modest amount of inflation to encourage investment in fixed assets (like condos in Vail).
There seems to be a growing certainty that the European Central Bank will inject a huge pile of cash into Spain’s economy (which is in trouble once again), which could further increase the amount of cash flowing into the global economy beyond the current expectations.
Translation: Mortgage rates should remain low at least through mid-2015.
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.