We’ve had our fair share of bad news recently. Earthquakes, tsunamis, lockouts, rioting. Since it’s a crisp 82 degrees in sunny Charlotte NC, I’m finding it hard to report anything negative. I previously mentioned how investors are fleeing stocks and entering the bond market (I don’t expect this to last); but for the time being this is causing bond prices to go up yielding lower returns.
Typically, what’s bad for investors is good for borrowers.
This week, mortgage rates began to tumble back down bringing the 15-yr from 4.15% to 3.97% and 30-yr 4.88% to 4.76%. I don’t see rates falling to where they were last year (hitting 40 year lows), but I’m thinking this will lead to a pretty Spring. How so?
Lower mortgage rates lead to new mortgage shoppers (Spring is a huge time for homebuyers anyways). Also, those with existing mortgages may consider refinancing for lower payments or cash out to make home improvements. These new projects will lead to more jobs within the construction industry. More jobs leads to more cash for people. When people have cash, they spend. When people spend (responsibly), the economy grows. Make sense?
This was a simple way to show how falling interest rates can really boost things; also explains why the government has insisted on keeping rates at record-lows. Now, I can give you a lot of predictions on where I think rates will go, but the best predictor is usually 10-yr Treasury Bonds. Let me quickly explain why this is…
They are both long-term investments. While Treasury Bond yields do not match up exactly with mortgage rates, they tend to be influenced by the same forces. Both are “loans” where a “borrower” agrees to pay principal and interest over a longer term. Because of this longer term, both “loans” or “investments” (depending how you view it) are sensitive to forces such as inflation, or supply and demand. If interest rates are low, it costs people less money to borrow (an incentive to spend). If interest rates are high, it costs more to borrow, and people will earn a higher return on investments (an incentive to save). This is the inverse relationship of 10-yr Treasury Bonds and mortgage interest rates. Thanks for attending Econ 101.
