Insights into Interest Rates

~Dennis Gartman

 

And so it was that in early May, a relatively strong non-farm payrolls number turned a tide of global bond market activity unprecedented in the last nine years, leaving higher mortgage rates in its wake. But how could just 165,000 workers added to US payrolls in one month single-handedly change the tone of the global economy? And more important to us in the mortgage industry, how does this affect rates going forward and our real estate recovery? The answer is both simple and complex.

 

Let’s begin with the simple. Since the onset of the Great Recession and the resulting job losses realized by millions of Americans, all eyes have been focused on the monthly employment reports. The financial world has understood that in order for our economy to get back on track, job growth would at some point need to resume at a robust clip. The Federal Reserve applied an all-hands-on-deck approach to the effort by attempting to use monetary policy to encourage employers to add workers. In addition to keeping inflation in check, promoting a healthy employment environment is the second prong of the Fed’s “dual mandate.” So their logic went that by keeping interest rates low and giving banks and businesses access to cheaper capital, a environment more conducive to hiring would ensue.

What resulted? Well, for many months, the numbers continued to underwhelm. While the bloodletting of jobs had certainly stopped, little evidence existed that Americans were again returning to the workforce in numbers sufficient to stay ahead of even normal population metrics, let alone to meet the future economic growth expectations. However, while the jobs dilemma remained, another dynamic was unfolding. Both the stock market, which has continued to reach new highs, and the bond market began to assume a

self-sustaining reliance on the notion that the Fed’s accommodative monetary policy would extend well into 2014, if not beyond.

 

And this brings us to the complex. As time has gone by and the economic data points have been reviewed, there has been a readjustment of expectations. Whereas 165,000 jobs would have before been considered “adequate,” it can now be viewed as relatively strong. With this strength comes the realization that should such favorable economic conditions persist and warrant, the Fed may decide to scale back or end its asset purchases. Because the Federal Reserve has been the single largest buyer of mortgage-backed securities and Treasury bonds, the interest rate markets have been reliant on their intervention. With their underpinning, the price of bonds has stayed high. This forces their yields lower and mortgage rates become one of the biggest beneficiaries of this policy and practice.

 

What was touched off at the beginning of May with a single report plays into an inverse market psychology — an improving economy likely portends an increasing of interest rates. So as fixed income (bond) traders have piled out of their investments, yields have surged and mortgage rates have risen. The move has been swift and, at times, violent.

So what can the home buyer do about an upward change in rates? What about those looking to refinance? Are there still good options available? First, it’s important to bear in mind that even with current changes, rates remain at, or near, all-time lows. For example, a 30-year fixed rate loan measured over the last 40 years has averaged 8.67%. Even with the recent rise many of RPM’s programs, FHA to super jumbo, remain below even half of this average! This translates to both purchasing power and to the ability to refinance into better terms. We cannot forget that recent home value increases have unlocked many owners from negative equity positions that prevented refinancing while rates touched all-time lows even just a few months ago.

…And regardless of which direction rates go from here — steadily climbing higher for good, or retreating back to previous, lower levels — we are reminded that there is a reward for action taken, and that delaying can often erode benefits we have come to take for granted in this low rate environment. It is still a great time to get a mortgage and none of us can ignore that fact.

 

Once again, the economic world is moving under our feet. Most times it’s imperceptible, but sometimes it’s an inescapable quake. Here at RPM, we know both ends of the spectrum and are happy to advise about your best options.   

 

Text and insights provided by an RPM collegue: Rob Spinosa