THE THREE FORCES DRIVING RATES
The mortgage industry’s primary voice/blogger, Rob Chrisman, recently wrote this:
“There are three forces driving mortgage rates these days:
- uncertainty about the effects of the pandemic drives money to the safety of fixed income securities (mortgage bonds) moving rates lower;
- inflation fear backed by data moves rates higher, and
- an infrastructure bill that will cause more Treasury borrowing and higher Treasury yields.”
And lately #2 and #3 (inflation and more debt) are beating #1 (uncertainty about pandemic) – so rates have climbed significantly over the last few weeks.
THE OTHER THREE FORCES DRIVING RATES
There are, however, three other major forces driving rates that he did not mention.
- Comments by the Fed. As I point out somewhat frequently, referencing Alhambra Partner’s Jeff Snider, the market often overreacts to the Fed’s comments before doing what it probably would have done anyway … irrespective of the Fed. Recently, rates shot up largely b/c of the Fed’s comments about tapering (or plan to buy fewer mortgage-backed securities). But, many market-watchers like Mr. Snider think “tapering” is all bluster b/c the Fed can’t raise rates without tanking asset prices, as the stock market (and the real estate market to some extent) is (are) dependent on or even “addicted to” ultra-low rates.
- China. As I mentioned in this blog about “China’s woes,” China has a huge debt problem of its own and numerous huge developers and companies (such as Evergrande) on the brink of bankruptcy. Evergrande and other Chinese companies defaulting on debt could start a domino effect that will tank asset markets across the globe and send interest rates way down.
- Competition. This cannot be overstated b/c it weighs so heavily on rates right now, and most consumers are oblivious to it. BUT – when rates climb like they have recently, refinance business dries up, resulting in far too much capacity in the industry. Lenders then cut rates down to the bone (where they make no money) in an effort to maintain market share.
Our best jumbo investor for example has barely raised its rates over the last few weeks, despite the overall increase in rates, in an obvious effort to maintain its volume during this slowdown. This is why we are able to quote such amazingly low jumbo rates right now.
WHAT FORCES WILL WIN?
The entire mortgage industry is literally praying that a weak, COVID-ravaged economy and/or a Chinese meltdown will overpower inflation, Fed policy and excess spending and borrowing – so everyone can enjoy “one more refi boom.”
If the declining-rate forces don’t win, about half the mortgage industry will disappear in one of the biggest industry meltdowns the world has ever seen.
This is something I have been discussing for years, but the industry has been repeatedly saved by continually dropping rates from 18% in the early 1980s down to as low as 2.375% (my rate quote below).
I might add that the companies that will survive (and thrive) will be the low-cost producers and innovators – who are able to fully embrace technology, new systems, and overseas labor.
Personally, after listening to hundreds of macro-economics podcasts and reading an equal number of related blogs, I think there is about a 60% chance that we will see one more drop in rates sometime in the next twelve months.
And after that we will either settle into a Japan-style stagnation or a 1970s style “stagflation” (with low growth and inflation).
I of course could be wrong – and will be the first to admit it if and when I am b/c being wrong makes for great blog-fodder 😊.
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