Mountain Mortgage Guy: Budget uncertainties will impact homeowners with a mortgage (column)
December 21, 2017
As the tax reform drama unfolds, nothing is certain in terms of how much new debt the federal government will be forced to take on. With (alleged) tax cuts coming and spending (for the most part) unchecked, the deficit is surely going to rise, and even most staunch Republicans agree that will happen.
In addition, maturing debt on the massive amount of treasury bills sold from 2007 on to stimulate the economy is coming due, and to pay off those bond holders, the U.S. Treasury must issue hundreds of billions in new debt.
Double last year
It is projected that the Treasury will need to raise about $1.3 trillion dollars in 2018, about double what it raised last year.
“As the new tax bill does not seem to bother addressing paying off the old debt and, indeed, promises a trillion dollars of new debt over the next decade, the question remains, will our nation’s creditors be in the mood to buy new debt when their old debt matures? ... If the government has to pay more to attract cash to finance its debt, then home mortgages will have to compete with the government and pay an equal return.”
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This does not mean the total debt will increase by that amount because much will go to pay off old debt (basically what consumers call using Mastercard to pay Visa).
As the new tax bill does not seem to bother addressing paying off the old debt and, indeed, promises a trillion dollars of new debt over the next decade, the question remains, will our nation's creditors be in the mood to buy new debt when their old debt matures?
At that juncture, supply and demand comes into play. Will there be enough buyers to purchase the newly issued debt?
Add to the factors of inflation and economic growth and the crystal ball starts giving off sparks and melting down. If the government has to pay more to attract cash to finance its debt, then home mortgages will have to compete with the government and pay an equal return.
In addition, the Federal Reserve Bank has bought and currently holds about 20 percent of the total U.S. debt, which has been a huge factor in keeping rates low (via increased demand to buy debt).
They clearly want to wind down their holdings but may not be able to. China holds about 10 percent more, and President Donald Trump is threatening a trade war with them, and they could retaliate by just not buying any new issuance of debt.
If the two entities that hold a third of the nation's debt decide they are going to cut back, then there is going be a notable drop in demand and, as such, a notable increase in the interest rate the United States has to pay to keep borrowing money.
Goldman Sachs has projected that rates paid on government debt might rise about a half point in the next year to about 3 percent on a 10-year T-bill.
That will probably translate to about a half-point increase in mortgage rates, putting a 30-year fixed-rate mortgage in the mid-4 percent range. Existing adjustable-rate loans are going to also go up accordingly.
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 questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.
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