Vail Daily column: World events make for fluctuating mortgage rates
July 10, 2015
From the halls of the Supreme Court to the ancient ruins of Greece to the floor of the Shanghai Stock Exchange, there have been events in the past few weeks that are impacting real estate and mortgage rates and may continue to do so for months if not years.
Mortgage money is a commodity, the source of funds for your home loan might well be a pool of investors including the Chinese government, the European Central Bank, a retired couple in Des Moines, a Wall Street investment banker and the Federal Reserve Bank. All of these own mortgage-backed securities, and every month part of your payment goes to pay back money they loaned to issuers of mortgage-backed bonds.
The key factors are the demand for mortgage money and the ability to attract investors to fund pools of money to lend out. So let's start with the easy side of the equation, kind of, and that is events that impact demand for owning real estate and mortgages.
The recent Supreme Court decision that gays should be allowed to marry legally in all 50 states may substantially drive up the demand for real estate ownership amongst gay couples nationwide. Owning property jointly with a same sex partner was complicated in many states, as were the tax consequences involving capital gains tax and rights of survivorship. In addition, access to some federal loan programs such as VA loans was complicated, though not impossible. The removal of these barriers is widely expected to increase real estate investment by potentially millions of same sex couples during the next several years. This will increase the level of home ownership, and likely increase property values and help revitalize the real estate market. When it comes to the supply of money, U.S.-based mortgage-backed securities are still regarded as a safe haven for money in times of uncertainty. While the U.S. economy seems to be rebounding nicely, the same cannot be said for China and Greece, and the impact of their problems is yet to be fully determined.
In China, their stock market has more than doubled in the past few years, making tens of thousands Chinese instant millionaires, and millions more substantial profits. In the past few weeks, stocks have tumbled by 40 percent or more wiping out trillions in equity. This has triggered some dramatic emergency measures by the Chinese government including restrictions on speculation and requiring company executives or large shareholders to hold onto their stakes and ride it out. Included in these rules is one that prohibits Chinese citizens from borrowing money on their homes to invest in stocks. While this has the impact of safeguarding homes, it also deprives the markets of a lot of potential investors, cutting demand even further which may make the problem worse.
As the U.S. economy found out in 2007, a crashing stock market tends to take everything else down with it. It's likely this could be a real turning point for China.
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The potential impacts on the U.S. economy could be that China will not be the sugar daddy to the U.S. bond markets, decreasing the pipeline of money flowing into U.S. bonds, which would then require offering a higher return to attract other investors, meaning mortgage and other interest rates could go up. More importantly, rates could spike just on the speculation that the supply of cash from China could dry up. It would not be in China's interest to completely destabilize markets by pulling out completely as that would hurt the value of the bonds they already hold, but even if they stayed home for a week and didn't actively participate in the bond market, then it would be noticeable and fuel speculation and volatility. The flip side of this is that investors globally may steer clear of China and invest in US stocks and bonds. There also may be speculation on how the Chinese meltdown will impact some companies, such as Wal-Mart, who are expanding rapidly in China and may face decreased consumer demand.
Several thousand miles west of China, in Greece, more drama is playing out as the Greeks defaulted (or as he European Central Bank prefers to call it "went into arrears") on payments on billions of debt. It is yet to be seen how this will fully impact global markets but it can't be good for the overall stock markets. This could result in a capital flight to the safety of the US bonds, or it might not. At best, expect there to be extremely volatile days ahead in terms of mortgage rates. If you are shopping for a home loan or waiting to lock one down keep in mind that while things could get a little better, they can always get a whole lot worse even quicker.
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.
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