From a political point of view, things may seem rocky, volatile and uncertain. As for the economy, it’s been kind of a dull ride as investors and corporations play things safe, waiting to see how the political dust will settle.
Mortgage interest rates have done nothing but hover around the lowest they’ve been in about three years. In fact, according to MortgageNewsDaily’s rate survey, the 30-year fixed rate of 3.95 percent is at almost the exact same place it was in November of 2016.
We’ve been waiting since the downturn in 2008 for rates to go back up over 5 percent, an indicator that our economy is back on strong footing. Prior to 2008, the last time, and only time, rates dipped under 5 percent was for a brief period during WWII when not many people were buying houses.
Since hitting their lowest point of 3.45 percent back in November 2012, almost every year, rate-predictors said rates would be up over 5 percent by year’s end. And every year, they seemed to end lower. Last year, in 2018, rates for the first time consistently went up and finally over 5 percent to about 5.17 percent in November before tumbling all the way down to 3.82 percent this past September.
Rates are tied to investors’ confidence in the economy. And the measure of rates are the measure really of that. When investors feel confident in their understanding of the economy, they buy stocks. Mortgage interest rates are tied loosely to the yield on the 10-Year Treasury, which goes up when investors are buying stocks and not bonds.
But when investors are spooked, they pull money from stocks and head for the safety of bonds. This drops the 10-Yield Treasury yield and mortgage interest rates with it.
Politically, this year has been relatively volatile. While major corporations and industries seem to be plugging along, they are playing it safe amid the uncertainty. One of the biggest rattlers of the economy is the threat of more tariffs against and the enticement of a trade deal with China.
If tariffs are put in place, that would surely make certain goods more expensive as they are taxed entering the country. Exactly which goods and exactly how that will affect the economy is hard for investors to predict.
Throw on top of that we are about to head into a presidential election year and everything that comes with it, and there’s a lot of uncertainty. Even if tariffs and a trade-deal is put into place, the Democrats could win the election and the new president could undo all of that. Then there are the impeachment hearings, which depending on which side you are on, are either a big show by the Democrats leading up to the election, or a serious inquiry which could lead to an eventual unseating of the president before he has a chance to defend his post in an election.
Investors and corporations seem to be playing things as safely as they can. Business investment in the third quarter declined as corporations opted to hold onto their cash. As one business owner put it in a recent Wall Street Journal report, they are kind of holding steady, but are reticent to put themselves into growth mode.
In the last election year, the economy seemed to be in a similar state. Mortgage rates slid for most of the year, right up until the election, after which they launched upward as investors scrambled to invest in the stock market with bets on how the new president would steer the economy. That lasted right up until the healthcare bill didn’t pass.
So with corporations trying to play things safe heading into next year, the Federal Reserve is doing what it can to nudge them back into the arena. They have lowered their short-term interest rate several times this year and may have another one in store for us before year’s end. This rate is the rate in which banks get back when they store their money at the Federal Reserve. Banks, like us, don’t like to hold onto cash. So when they have it, they invest it. When the economy tanked in 2008, banks didn’t see any safe places to put their money, so they went to the Federal Reserve.
The Fed thought it better to push them back into lending money to businesses and to get the money working through the economy. So they lowered the interest rate to 0 percent. That’s kind of what the Fed is doing now. Shoving money back into the economy.
While the political circus pushes on, the rest of us will do our best to keep things on track.
Geoff Smith is a mortgage banker with Assurance Financial focusing on residential home loans for refinances and home purchases.
*The views and opinions expressed in this column do not necessarily reflect the views of Assurance Financial Group