Why mortgage rates might very well stay low after all

Story by: Brian Weide

In the two years (this week) I've been writing this report, this is about the third time I've written as to why mortgage rates might very well stay low after all. This implies a change in the previously, and widely held, assumption that mortgage rates would soon be heading higher; but wait a doggone minute, maybe not! As this report is being written, mortgage rates are literally at all-time lows!

The one thing that has been consistent in the repeated scenario of surprisingly long lasting, near-record-low mortgage rates has been a breaking of the assumption, each time, that the economy was getting stronger, which would almost surely revive a fear, if not a reality, of inflation, and that would just have to mean that interest rates in general, and mortgage rates specifically, would be heading upward. But every time this has happened since the end of the Great Recession there is a hold put on the stronger-economy scenario that would have supposedly led to higher rates. This time is no exception.

 

As you may be aware of from paying attention to the business media in general, what had been going on in Europe for the past year or so had a lot to do with why U.S. stocks were lower for a time and why interest rates in the U.S. were near subterranean. Of course, up until earlier this year when the EU, the central banks of sovereign European nations (Germany, France, etc.) the IMF and most of Greece's creditors came together to allow the country to avoid a technical default, the Greek dilemma was on the front burner in Europe. But indeed an agreement was reached, or at least enough of an agreement that global economists could pretend things were all better. But many analysts, including this one, feel that all that really occurred with Greece was that the can was kicked down the road - that Greece was not really made to make any profound changes that would keep it from going belly-up in the intermediate term. I mean, really, while Greece did technically avoid default, it was only because most of its creditors took a 50 percent haircut; i.e., forgiveness of debt. Is a default, which is defined as a repudiation of agreements between an entity that owes money to its creditors, really avoided when those agreements are merely altered to fit a new convenient reality? How's that for a discussion topic?

OK, so with Greece out of the way (yeah, whatever), there's a new crisis in Europe, and it's Spain. Spain has been a point of concern for some time now, but has particularly been brought to the forefront in the month of March and April. Spain's yield on its 10-year notes is in the 5.8 percent range while U.S. 10-year notes are sitting at 1.92 percent. This is a symptom of Spain's being a candidate for default as was the case with Greece. But Spain's economy is much larger, with a GDP approximately 4.5 times that of Greece. So while a Spanish default is much less likely than the Greek variety, should it happen it could be much more devastating for the European, and therefore, the U.S. economy.

 

Just last week it was announced that Spain has had a negative GDP for two fiscal quarters in a row, which defines its economy as being in recession. And this is now the second recession for Spain since the recent economic downturn started late in the last decade. And that's why Spain is being watched so closely.

 

Greece and Spain are not the only problem children in Europe. World economists and central banks are also watching Ireland, Italy and Portugal. And there could eventually be even more dominoes in the set.

 

Over this last weekend, elections in Greece and France were held, for which the results will almost certainly change the economic landscape in Europe.

 

As a result of the elections in Greece, the two main parties, the socialist Pasok and the conservative New Democracy, will no longer be able to continue their governing partnership without the inclusion of smaller parties, who have announced their intentions to renegotiate the conditions for the bailout package which keeps Greece from defaulting (technically) on its public debts.

 

France's, socialist Fran ois Hollande, who defeated Nicolas Sarkozy for the presidency, campaigned on the promise to put an end to the dictate of austerity, which had been prescribed as a cure to Europe's sovereign debt crisis.

 

If Europe does not have the political will to stick with austerity measures that had been previously agreed to, then look for U.S. stocks to fall and bonds, especially mortgage-backed securities, to reach even higher highs. This would mean even lower mortgage rates.

 

Focusing back on the U.S., economic growth also seems to be slowing a bit. Employment had been exceeding expectations since the first of the year, but non-farm payrolls have been coming in below consensus estimates of late. (The next non-farm payrolls report will be released this Friday, along with unemployment.) Additionally, initial and continuing claims for unemployment come out every Thursday and, up until a month ago, had been below, but are now exceeding, estimates. Personal spending, in the most recent report, came in below expectations. It's consumer spending that does the most to drive a recovery. It's tends to shadow consumer confidence. When consumer confidence and, therefore, spending, lag, this is almost a sure sign of a slowing economy. Is this a sign of things to come, or merely a temporary blip on an otherwise robust recovery? Time will tell.

 

What I constantly find so interesting is that, despite dissention on the Federal Reserve Board, or more specifically, the Federal Open Market Committee (they're the ones who set Fed rate policy every six weeks), Fed Chair Ben Bernanke seems to hit the nail on the head every time when he espouses continuing to keep rates low even during the first signs of economic recovery. He usually makes the case that employment is still too high (now at 8.2 percent), and that occasional bouts of inflation, usually brought on by intermittently higher oil prices, are temporary in nature. (He also proclaims that the recovery in housing is far too anemic.) And sure enough if he's not usually correct, even when prognosticating against the grain of many other Fed regional presidents that would like to start raising rates yesterday. Ben Bernanke continues to garner a slim majority of his cohorts to vote along with him, which is why we still have near record-low mortgage rates.

 

Like the Sun eventually engulfing the Earth in a massive supernova, it's inevitable that mortgage rates will eventually rise. But neither event may happen anytime soon!

Brian Weide can be reached at brianweide@prodigy.net

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