It’s been a long time coming, but mortgage interest rates have finally returned to their 2016 Election Day LOWS.
Here’s the quick and dirty on what you need to know about mortgage interest rates: They track inflation expectations. So when a Republican surprised the markets and won office back on November 8, 2016, there was a shock to inflation expectations (and you can see interest rates spike in the ensuing days in the chart above). Then when tax reform went into effect, more inflation concerns arose. THEN, finally, when trade wars started to heat up, there were even more concerns!
Thus, mortgage interest rates rose consistently until November 2018. However, everything came to a head in November 2018 and concerns over the economy started to rise. Which meant inflationary fears started to dissipate, and mortgage interest rates started to fall. Which brings us to today, where after a really great two and a half year roller coaster, we’re back where we started.
But this isn’t what has mortgage interest rates hitting their multi-year lows.
Let’s talk about the Fed
When the Fed adjusts interest rates, they’re adjusting the interest rate on short term credit. On the surface, whatever the Fed does, mortgage interest rates should actually do the opposite, and here’s why: When the Fed lowers interest rates, they’re worried about the economy and trying to prop it up so they’re lowering rates on things like credit cards, home equity lines of credit, car loans, personal loans, etc. Basically, they’re lowering the interest rate on credit people use to buy stuff with now. This provides support to the overall market, which technically should cause inflationary fears and therefore increase mortgage interest rates.
But in economics, things aren’t as easy as X à Y à Z. First of all, the rate-cut by the Fed was already priced into the market. It’s been expected for months that they would do this, so the markets were already factoring in a .25% lower Federal Funds Rate before it even happened. The other part, and the part that actually moves the markets is the Fed statement. So, despite the Fed lowering rates which should cause mortgage interest rates to rise on increased inflationary fears, they pair that action with comments about doing so because of a possible market slowdown. This counteracts the Fed move to lower rates, and mortgage interest rates, for the most part, remained completely unchanged on Wednesday.
So, why did rates fall so much this week? The trade war with China. Mortgage interest rates were chugging along all week mostly unchanged (despite the Fed activity) until Trump announced the US is going to place an additional 10% tariff on the remaining $300 billion dollars’ worth of Chinese goods, effective September 1st.
Mortgage interest rates immediately tanked on this news. This move in and of itself would actually increase prices, which would increase inflation, and should make mortgage rates go higher. But on the heels of the Fed warning about the global and US economy slowing down, and knowing that China is certainly going to retaliate with additional tariffs on US goods, this is nothing but bad news for the markets. Thus, the stock markets lost ground, money floods into the safe haven of mortgage bonds, and mortgage interest rates dramatically fall.
In the short run, the lower mortgage interest rates go the more purchasing power Puget Sound Homebuyers have. In the longer run, if there’s a global slowdown then that’s going to negatively impact Puget Sound’s economic backbone. Boeing, Starbucks, Microsoft, Tableau/Salesforce, F5, Weyerhauser – these will all suffer on the heels of a global slowdown. I left Amazon and Costco off this list because I’m not sure if they’ll suffer as much. If anything, it might actually help them if it encourages people to shift their purchasing habits to less expensive items, which can be found on Amazon or in bulk at Costco. NOTE: Between January 2009 and January 2012, Amazon share price rose 229% and Costco share price rose 64% #RecessionBusters.
Scott Sheridan is a Loan Officer with Primary Residential Mortgage, Inc. Being in the mortgage industry for three years, Scott brings a fresh millennial flair to the industry. He is well-versed in the most modern, efficient, and convenient ways to get things done. Scott combines these skills with a genuine love of his work and recent experience in what is it like to be a first and second-time home buyer. You can follow Scott’s weekly market updates on his PRMI