With tariff wars deepening and the Federal Reserve now preparing for rate cuts, mortgage rates have fallen through the floor, and we are now back into the 3 percents for a 30-year fixed-rate mortgage.
For those of you who do not follow such things, this is a total shocker to the investor and to mortgage bankers who, back in January, thought any rate in the 4 percent-range was gone for a good, long time. I also know it may not seem as interesting as my wife and son’s Odyssey World Championship from last week, but the significant drop in rates over the last six months is a symptom of an uncertain world economy.
Certainly, it isn’t a failing world economy. The S&P 500 index is still up on the year, although it dropped sharply over the past month. Gross Domestic Product, a measure of the total value of goods produced and services provided, grew in the first quarter at a strong rate of 3.1 percent. But the same report released by the U.S. Bureau of Economic Analysis, also reported decreasing corporate profits.
Our economy was running at optimum conditions at the beginning of 2018. Economists stated that we were running on all cylinders, meaning there was enough work available to require every productive ounce of every available worker. That was a strong statement for the state of the economy, but it left a looming thought about future growth: without a major advance in technology, if we are using all of our available workforce, how do we continue to grow?
Well, we didn’t get an influx of new workers, there was no technology boom to make our existing workers more productive, and demand for goods and services around the globe seems to be decreasing. That is the environment that so far this year has relieved any pressure to push interest rates up. What pulled out the floor from under them was an ever-increasing trade-war between the U.S. and other countries.
Economists and investors were already uncertain as to how we were going to grow with a depleted workforce and decreasing demand for goods and services. Their uncertainty is now growing to a fever pitch as the U.S.-China trade war has escalated to a point where China is pulling tricks that include sending out false statements to its citizens not to travel to the U.S. because they could expect interrogation and harassment by U.S. law enforcement agencies. China has also fined and investigated U.S. companies there — it fined Ford $23.6 million for antitrust violations and is investigating FedEX for “wrongful” deliveries, according to a Bloomberg report. Our answer is to keep increasing tariffs on all imported Chinese goods and services.
The trade war increased in breadth to include Mexico as our president threatened to impose tariffs if the country didn’t do more to stop illegal immigrants from crossing the border into the U.S. And then there are also talks about tariffs for products coming in from the European Union.
All of this has created a cloudy picture of the future of our economy and economists and investors cannot predict where the profits will be. And when investors do not feel comfortable in predicting who will profit, they typically do not invest in the stock market because the risk is too great. Instead, they move their money to more safe investments with a more stable rate of return, like bonds. So in this environment, bonds have been sought out and bought. When bonds are bought in high volumes, their yields go down.
Mortgage interest rates tend to mimic the movement of the 10-Year U.S. Treasury yield, mostly because the average loan lasts about 10 years before the homeowner sells their home and pays it off. So with bond yields falling quickly, mortgage rates have followed and we are now back into the 3 percent range for a 30-year fixed mortgage. This could spur a quick boost to our residential real estate industry which had been slumping along so far this year. Homeowners could either decide to go ahead and buy during a low-rate boom, or they could decide to refinance their current mortgages (anyone with a 4.5 percent-rate or higher should be calling their lender right now for updated loan numbers.)
Time will tell how this all plays out. Nothing yet has been proven dire, but economists, economic policymakers and investors are preparing for a possible storm.
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