Rarely, some say never, before have we experienced such political unrest in our country and around the world. The current climate affects each of us in individual ways. But, for purposes of this article, we will look at how a normal family, looking to make a new home purchase, as well as the homeowner refinancing a home, are affected. How can the world’s political movements actually cause interest rates to rise and fall?
While the financial health of borrowers affects the interest rates they are offered, government financial policies affect the whole interest-rate universe. Demand for money to borrow at attractive rates of interest propels rates to go higher. It’s the old supply-and-demand adage. But, at the end of the day, lenders only have so much to lend out. When the opposite effect goes into play, interest rates decline. Unemployment and declining wages cause decreased demand for home loans and lenders who once wanted their money out there draw back.
Five factors are thought by most experts to be today’s most important “influencers” on interest rates. Learning these principals gives us a good way to look at what we’re paying now and can expect in the future.
INFLATION. Inflation, the gradual upward movement of prices, affects goods and services and the purchasing power of dollars over time. Inflation is bad for all consumers. High inflation erodes the level of interest rates that mortgage lenders generally need to maintain in order to overcome the erosion of purchasing power through inflation. To achieve a profit, mortgage-loan rates must increase with inflation to ensure that interest returns represent a significant net profit. Simply said, inflation must be controlled buy governments or interest rates will tend to increase for home loans.
ECONOMIC GROWTH. The indicators of economic growth, such as the GDP (gross domestic product) and the rate of employment influence mortgage rates. When consumer confidence is high, employment is plentiful and home purchases are in demand, mortgage rates are forced up. This makes sense and seems normal... even stable... until politics interferes in the way of a major election. Historically, in an election year, rates lower during the months leading up to the actual election day, then bump up slightly immediately following. Will 2020 follow this pattern? I predict, with the debates, the partisan bickering, the division of thought and beliefs, that interest rates will remain constant until next November when we will see a drop or lowering of rates.
FEDERAL RESERVE. Hard to believe I have gone this far in this article without even mentioning the Fed! It is one, if not the, most important factor affecting the economy, interest rates and the employment climate. Although the Federal Reserve does not set rates for the mortgage market, its actions in establishing the Fed Funds rate and adjusting the money supply up and down impact interest rates offered to the borrowing public. Once again, in an election year the Federal Reserve becomes even more cautious while watching how political parties are behaving, polling and how the general economy is reacting to the probable winner. When the Fed refuses to increase their funds rate they are supporting a stable or lowering effect on home mortgage rates.
BOND MARKET. Banks and investment firms market mortgage-backed securities as investment products. In order to attract buyers, the yields available must be sufficiently high. This equation is affected by the fact that government bonds and corporate bonds offer competing long-term fixed-income investments. Lenders have to generate sufficient yields for these securities to make them competitive in the debt security market. The benchmark frequently depended on by mortgage lenders is the 10-year Treasury Bond yield. Although the yield to investors is lower than that of a mortgage-backed security, government bonds are safer.
HOUSING MARKET CONDITIONS. Trends and conditions in the housing market also affect mortgage rates. A decline in home purchasing leads to a decline in the demand for mortgages and pressures interest rates downward. Prior to 2018, home purchases were reacting to an onslaught of renters. Therefore, this downward market pressure caused interest rates to remain low. But, in 2019 home purchases were again on the rise due to lower unemployment, and a rise in the GDP. When consumer spending is at a high level, home purchases increase and interest rates respond accordingly.
Political influence is at an all time high. It will be interesting for all of us to watch how our economy in 2020 responds to this all-out war between partisan philosophies and to judge how the outcome affects mortgage rates and our lives, in general. May 2020 be your best year yet.
Jim Gay was a real-estate broker for over 20 years and has consulted for Fortune 500 companies. He is currently broker/owner with The Mortgage Place (505-986-9080) in Santa Fe and can be reached at firstname.lastname@example.org