These words are intended primarily for the edification of those clients who are trying to understand the ups and downs of interest rates:
The average rate for a garden-variety Freddie Mac loan fell to 4.49% last week, down six basis points from the prior week. And rates are likely to continue edging down. (The broader index computed by HSH Associates, which also includes jumbo mortgage rates, likewise fell 6 basis points, reaching 4.75%.)
Why? For several years we’ve seen rates fall whenever the prospects of the economic recovery were in doubt. Conversely, they rise when investors become more confident that the recovery is firming—something that hasn’t been happening much of late.
Let’s look at this through a real estate lens for a moment. The number of new applications for purchase money mortgages for the week ending June 3—as confidence in the economy was continuing to decline—fell by 4.4%. At the same time, applications for refinancing loans—as interest rates edged down further—grew by 1.3%. Refinancing homeowners aren’t looking for a powerful economy, after all; they want to nail down the lowest possible interest rates.
There is activity, in other words, in many areas where consumers recognize the benefits of acting –such as refinancing—but the economy still seems to have stalled for the moment. This can confuse us. Beneath the stall lurks a set of fears that, if anything, seem to be worsening.
There is, for example, a growing concern that Greece will soon default on its debt. Though this will most likely be given a bit of cosmetic surgery so that it looks as if no default actually took place, most of the market will not be fooled. Other nations are likely to want similar treatment…and Europe will move another step closer to the possible collapse of the euro as the currency for almost all European countries.
This would excite a bit of chaos in European markets and, by extension, in the rest of the world. When the butterfly exercises its wings in Athens, says Confucius, a wind storm often results in distant lands. That is how closely related world markets have become.
Intriguingly, about two years ago when I was writing commentaries for a very large corporation, one of the vice presidents who vetted anything I wrote sent an article back to me. I had suggested that the course of events in Greece would prove very important even to American investors. “Not likely,” he said. “Greece’s economy is too small to affect us very much.” You could sense the veins bulging in his forehead.
Was the relative size of the Greek economy the reason? Or was it that the giant corporation didn’t want to call attention to the fact that it had loaned a great deal of money to Greece and had much at risk in this and many other parts of the world?
The vice president and I no longer correspond these days, but we are still hearing about Greece—and Portugal, and Ireland, and Spain, and so forth. And we will continue to hear about them for years to come. Perhaps, in fact, the euro won’t survive more than five more years.
When we talk about confidence among investors, therefore, we need to watch seemingly distant issues like the Greek sovereign debt. As long as it is threatening to create a windstorm, it is creating worries, and as a result, we’re that much further from the kind of confidence in our economic recovery that will allow more homes to sell, their prices firming at last. At which point, as we keep reminding ourselves, interest rates start rising again.
In short, now is the time for borrowers to arrange whatever financing is within their reach. It may get slightly cheaper to do so for a brief period of time, but in the longer run, it’s bound to get significantly more expensive. The winds will rise.
by: Bill Fisher
