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By September 26, 2016 0 Comments Read More →

Does America Have A Mortgage Rate Hangover?

canal Mortgage rates fell after last week’s decision by the Federal Reserve to keep bank rates both steady and low. The Fed’s inaction was hardly a surprise, it could not raise rates just before a presidential election and in an economy which remains iffy and fragile. The bigger question is how long low rates – including mortgage rates around 4 percent or less – will be with us.

This is not just an issue for real estate borrowers. If you’re financing or refinancing a house you surely want the lowest possible rate, that’s rational and understandable. But on the other side of the table, investors – the folks who put up the money used for loans – are no doubt beginning to scratch their heads.

“Eleven trillion dollars of negative yielding bonds are not assets — they are liabilities,” says Bill Gross with Janus Capital.

Yup, negative yielding, as in an interest rate of less than zero. That’s the interest rate on some $10.9 trillion in debt worldwide according to Fitch Ratings.

US Mortgage Rates

In the US, of course, our rates are higher – but not by much. As of Friday, the Treasury Department said 10-year securities, the securities which most-closely compare with 30-year mortgages, were priced at 1.62 percent. In August the inflation rate was 1.1 percent, meaning Treasury investors are getting almost no additional buying power from their investments — and extra buying power is the real definition — to paraphrase Queen — of a crazy little thing called wealth.

All economies have their ups and downs but after a decade we seem to be in a trough. Until its .25 rate increase for banks last December the Fed had not raised rates since June 2006. Now the rumor mill suggests that another increase will take place once again in December, but that’s just a guess and not a certainty.


The Fed, of course, controls interest rates for banks but it does not set mortgage rates. They move with the market and the Fed can influence the market in general. Looking forward, the Mortgage Bankers Association estimates that mortgage rates will not top 4 percent until the second quarter of 2017.

Such forecasts are good news for borrowers because anything near 4 percent is a financial miracle. For investors, the story is different. If rates will rise in the coming year why make loans today? Maybe it makes more sense to find a giant mattress where cash can be quietly hidden away. Or, make loans artificially tough to get for those with less than perfect credit.

Mortgage Rates Vs. Hoarding

In fact, this is exactly what’s happening today. The nation’s banks have deposited excess reserves with the Federal Reserve that were valued at $2.25 trillion as of August, money not loaned out to potential borrowers.

The wait-for-higher-rates strategy makes sense – if rates ultimately rise. But what if they just hum along for the next few years? What if they go down?

Investments don’t make a lot of sense if they do not produce more buying power. Right now US investors are barely getting a return, as to tomorrow who can say?

Imagine that there is good news for investors and rates do go up. Then we have to ask if household incomes will rise enough to support higher interest rates. If not we may have bigger problems than just a few outraged coupon clippers; instead we could face an economic fragility that goes on and on, a financial hangover.

Photo courtesy of Linh Nguyen.

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