Wall Street, Mortgage Rates & The Web Of Debt

Wall Street, Mortgage Rates & The Web Of DebtWall Street is in the midst of the steep sell-off as this is written, but if you look at the world of mortgage rates things are not only looking good they’re looking better than they did a few weeks ago.

The yield for 10-year Treasury securities is now below 2 percent for the first time since the spring. In general terms mortgage rates and 10-year treasuries move in tandem because investors believe that 30-year mortgages are likely to be outstanding for far less time. In fact, according to Freddie Mac the typical mortgage at this time is only 5.6 years old before it is refinanced.

The reason that mortgage rates are now below 4 percent is that money worldwide has been flowing into the US marketplace for several years because investment opportunities elswhere have diminished. As an example, investors in Europe and Asia have been getting negative interest. In such a situation even low rates in the relatively stable American marketplace look awfully good.

Now, in addition, investors who could have put their money into stocks on Wall Street are moving funds into fixed-rate investments such as treasuries. This will continue until the stock market stabilizes, which is something it will do at some point. When the market does calm down then some of the money which has been shifted into bonds will go back into equities.

For mortgage borrowers the turmoil on Wall Street is not pretty but it does have its attractions. Lower mortgage rates make homes more affordable and expand the pool of potential borrowers. These are two factors which can help support rising home prices.

Mortgage Rates & Savings

One of the great complaints on Wall Street is that consumers are saving more than they should. The argument being made is that the economy would do better if only consumers spent more. However, having been burned by previous Wall Street crashes as well as the mortgage meltdown, consumers understand that it is in their interest to have as little debt as possible.

Figures from the Federal Reserve Bank of New York show that mortgage debt stood at $8.6 trillion at the end of the second quarter – down from $9.96 trillion at the start of 2009. This reduction in debt is enormously important because with smaller mortgages consumers are better able to ride out tough financial times.

Combine lower levels of mortgage debt with interest rates which are not far from historic lows and you can see that homeowners are very well positioned to hunker down when times get tough.

Non-housing Debt

Unfortunately, homeowners also have non-housing debt. This form of debt has risen significantly since 2008, going from $2.71 trillion to $3.21 trillion at this time. The biggest culprit by far is student loan debt. It has increased from $260 billion in 2004 to $1.19 trillion today.

It is the spectacular increase in student debt which explains in large measure why existing home sales to first-time buyers have fallen substantially from the historic norm of 40 percent or so to 28 percent in June, according to the National Association of Realtors.

The big question looking forward is not what happens today – today will be a mess on Wall Street – it is whether we are entering a new era of financial realism, one which will encourage still-more consumer savings, less debt and low-interest rates.

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