In theory it all makes sense. Mortgage rates are on the rise, a direct result of the Trump election victory. The reason is that if Trump can really spend $1 trillion or so on infrastructure improvements it means a huge boost to the economy. At the same time, since Trump wants to pay for such construction with bonds – more government debt – a massive government-funded construction program might push up inflation. To offset higher levels of inflation investors now want more interest.
The problem is that there may not be a massive infrastructure program. More debt is something Republicans oppose with religious fervor and Republicans control the House, the place where all spending bills must originate.
Another problem is that the world is now awash with $50 trillion in cash, so borrowing $1 trillion may not be enough to force higher rates. As the Business Insider explains, “nearly three-fourths of that $50 trillion of cash is receiving less than ½% annual interest. The remaining fourth ($13 trillion) is paying negative interest rates.”
Higher Mortgage Rates in 2017?
So what about the mortgage-rate increase we have seen in the past month or so. Does it not assure higher rates in 2017?
The Trump spike may not pack the wallop many people expect. For instance, higher rates mean that refinancing activity will plummet as borrowers hold on to low-interest financing. Home sales may stall as marginal borrowers are pushed to the sidelines.
It may be that the current interest rate rise merely anticipates the expected Fed rate hike which is expected in December. As we saw with the last Fed rate increase, mortgage rates rose at the time of the Fed action – and then fell back.
Lastly, the interest-rate spike may simply be coincidental, related more to announced efforts by OPEC to curtail production and force up oil prices than too much else. OPEC, of course, will be unable to enforce a production slowdown because a number of major oil producers — Russia, Venezuela, Iran, Iraq and even Saudi Arabia — need the cash.
So here’s a thought: The instant mortgage rate increase seen during the past few weeks could well run out of steam as people – and Wall Street – see that in reality not much has happened. The infrastructure program has not been passed at this time and for all anyone knows maybe Congress will only be able to stomach a much-smaller deficit increase or perhaps no additional deficit at all. Worldwide, there continues to be a massive capital surplus with so little borrowing demand that trillions of dollars are now invested with negative interest.
Yes, mortgage rates are up at the moment but don’t panic. They remain ridiculously low by historic standards and the way things are going they could fall again, say by next Spring….
(Photo courtesy of Giovany Pineda Gallego)