It was an interesting day in the Financial Markets! I’ve received a few interesting phone calls and emails in response to a few commentaries I made the other day. It was one of my first ever call in radio events and I was a bit nervous, once I forgot what I was doing, I seemed to settle down and resolve to a measured degree of coherence. I hope.
For those who are tracking Interest Rates as part of a pending acquisition or refinance and have growing concerns over the seemingly unending financial uncertainty, perhaps the following summary might be of interest. If I’m able to retrieve/create an electronic audio file that is reasonably intelligible, I’ll make the “link” available to you, I’m told it was quite good, you might enjoy it as well. With that thought in mind, note the following “bullet” points from the discussion:
- The World Financial chaos has triggered a transition of Funds from Equities (stocks) to the presumably more stable Government Note/Bonds (U.S. Treasuries).
- The expected consequence of this transition is for the market demand for “Bonds” to respond with an upward move in price.
- The “net” effect of this, understanding that Bond Yields move “Inverse” to price, i.e., Bond Price goes up (due to demand) with the corresponding effect that the Yield (%) move down.
- The effect of this function is to suppress , or lower, corresponding 30 year fixed mortgage rates as pricing, more or less, is largely reflective of these Bonds “yields” (specifically responsive to U.S. Treasuries). There are, to be sure, other issues that go in to mortgage pricing, e.g., “margins” etc, however I’ll save this and other topical issues for another time. Regardless, Bond Yields are the dominant force.
- The Government Sells the “Treasures” by way of Auction. These Auctions occur on a regular basis. It is believed, an opinion also held by yours truly, that in order to attract a greater number of Buyers to the Auctions, the “Yields” need to be higher to attract Investors to these Instruments vs. other Investments of equal or higher Yield. Accordingly, it is not unusual to predict a corresponding increase in “Yields” to accompanying a “coming” Auction. How the “Feds” accomplish this is a subject for another time.
The recent spike in interest rates is likely following a predicable cycle respondent to Treasury Auctions. Although I do believe that the trend in interest rates, due to Systemic Economic Fracturing, will tend to push Interest Rates in an upward direction. What occurs in actual practice will have to be more of a “wait and see” function as there are other Economic Crisis to come that are presently only slightly concealed by the horizon.
What are these?
The first one is the impending Commercial Real Estate Collapse that will likely dwarf the Residential Markets by a factor of “2”.
The next will be the Obama Administrations unprecedented and unregulated Financial Market/Industry Bailout now estimated in the range of $14 Trillion.
Following that, the planned Government Budget for 2009-10 that, including “off” & “on” Book items, is rumored to be nearing $4.9 Trillion!
Then, add to this the coming indulgence of charismatic arrogance and financial ineptness, Universal Health Care, estimated to have an annual cost of $2.8 Trillion (again, ANNUAL) !
And if your tummy isn’t swirling by now, let conclude with the unfunded Social Security/Medicaid/Medicare amount of $110.9 Trillion, which by the way, increases at a staggering $1 Trillion PER YEAR.
We need to also understand that these numbers do not include the existing Government (pre Obama) of $11 Trillion that accrues an annual Interest cost of nearly $900 Billion per year.
What does all this have to do with Interest Rates? Simply, the money to pay for this is going to have to come from somewhere! Simply Economics tells one that Demand tends to push prices higher. IN this case, the prices I speak of are “Interest Rates” / “Yields”!
What is the interaction of Government Debt (Deficit)? The Government (The Federal Reserve/U.S. Treasury) has long justified Deficit Spending on the grounds that it can pay off older debt easily because of the Effects of Inflation. Think of it this way. Who among any of us can look back at a home we may have purchase years ago for $190,000 with a mortgage of $150,000 then, 10 years later, payoff that same $150,000 mortgage (in 10 years perhaps down to $119k) with a new loan of $200k on the very same home now worth $500k!
This is exactly how the Government Monetary Policy Functions,…EXACTLY! However, what is the fundamental requirement for this cycle to occur? Simply, INFLATION! The problem with INFLATION, is that in only works in this practice, in a beneficial way, when paying off Debt and if you’re the Government. For everyone else, it only becomes, in effect, the chasing of an every decreasing Tail! Regardless, it is inevitable that there will be an intense force building that will result in the only direction, using the current Monetary Policy Model, it can and that is massive inflation! Personally, I seriously believe the Global Monetary System has a far bigger plan in mind (subject for future discussion)!
- Lean up on your unsecured debt load as much as possible.
- If you are in the refi mode, get your loan documents “in” to your Lender and get your Loan Approved but do not lock your rate.
- Unless you are under pressure for Escrow Reasons or others, hold from “locking” and track the 30 Year Long Bond (TC30Y) which is a fabulous indicator of rate “yields” and “trends” and watch for it trading in its “peak” range. Stay in touch with your Lender and track their Rate and Pricing and always be aware that shorter term “locks” , e.g., 10 day vs 30 day, are more favorable as to pricing.
- Many Clients have asked me, do I think we’ve hit bottom, as to Home Prices. The best answer I can give is this: the market floor, for any area, tends to be “replacement” cost. “Price Plunge” tends to slow drastically as it nears this point. In the markets I monitor, Pricing is at or near this point. In my Home market, In my home market (Sonoma County), there is a clear distinction in price ranges and their respective floors. In the Sub-$450k range I believe the market “floor” is showing strong signs of firming and I believe this will persist through July ’09. In the price ranges above, it is an all together different market as the numbers of “troubled” properties in this market segment are distinguished by the fact that they are impacted by an increased number of variables. Accordingly, they are on more of a case by case basis.
- Looking at historical data and understanding the last sentence in the preceding paragraph, the best hedge against the coming upward spiral is to make your move before it happens. I wish I could tell you when “IT” was, I just know that it WILL happen. If I were to apply my intentions to issues of Price vs Interest rate, I would tend to be more concerned about Interest Rates in the decision making process. Why? So what if you might save, as an example, $20,000 in Purchase price by waiting 6 months if in doing so, you find yourself at a rate of 6.25% vs 5.5%. Remember, the purchase price occurs only once, the interest rate occurs 24 hours a day, 365 days a year for as long as you make the payments. That $20k saving can disappear oh so quickly!
All the Best! And, by the way, if you think a Friend or associate may benefit from this information, feel free to pass it along! You might even consider introducing them to the “blog”. Always great content!
Curtis C. Greco, Founder