I wrote the article below a couple of days ago for a blog on political and economic freedom. I’m reprinting it here after enjoying some discussion on the matter with fellow Bloodhound and VA mortgage expert Brian Brady. Besides it being a brilliant piece (of tin foil hat wearing rantings), the article does actually touch on an area that could be of great importance to our real estate buying clients: mortgage rates. You see (in an over-simplified explanation), when the world gets scared, money flows to safety. Safety, at least for the time being, still resides in US bonds. Though not always correlated, the interest rates on mortgages often travel in the same direction as those on bonds. So if, for some crazy, unforseen reason, the world becomes a little apprehensive over the next 2 weeks, we might see mortgage rates drop. The question is: when do you lock the rate for your client? Well, if we knew the actual date this crazy, unforseen event may occur, we could watch closely and lock right up to the day before. Why the day before? Because there are three possible outcomes to this disruptive event, and two of them are bad:
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It could turn out to be a tempest in a teapot, in which case money will quickly flow out of the bond market and interest rates will rise. (Because of the inverse relationship between bond prices and interest rates, when people sell bonds the price drops and the rate rises… I see people’s eyes rolling back in their heads… moving on then);
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Or, things could go as bad or even worse than expected and oil prices shoot up (geographical hint), causing inflationary fears. Because inflation erodes fixed rate returns, bonds sell off and interest rates rise in response;
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Or, things could go as bad or even worse than expected adding to the already existing fear – oil prices be damned; in which case even more money flows to the safety of bonds and interest rates continue to drop.
As you can see, of the three scenarios, two give rise to higher interest rates making us heroes for locking our client’s rate before the event. If, on the other hand, we find ourselves knee deep in the third option… well, we don’t like to talk about it in the mortgage world, but the right thing to do by our client is move the loan and lock in the new, lower rate. Either way: hero.
Obviously you should discuss this with your lender, as your mileage may vary. But if rates begin to drop over the next week or two – and maybe you read some crazy article that mentions a big event on the horizon – think about locking in ahead of time. Now, to scan that horizon. Hey, maybe Congress can give us a clue…
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(Before reading, please make sure your tin foil hat is securely buckled…)
Don’t Let a Good Rage Go to Waste
Anticipation
It’s been a little while since I pulled the shades, broke out the tin-foil hat and dipped my quill with crazy ink, but old habits do die hard. I’m reading about Congress delaying their eventual vote on the federal budget by creating a 2 week stop-gap measure with a whopping $4 billion cut in spending. (For those just tuning in, that’s .001 of the Federal Budget or 1/10 of 1%. Don’t ever say those people in Congress aren’t up there making the tough decisions…) So, Congress is delaying the vote for two weeks, with no real reasoning behind the decision. Does it seem likely that either side is going to have a come-to-Jesus moment in the next 14 days and realize the other side was right all along? I don’t think so either; so why the delay? Alright, this is a tough one. Much like Congress, let’s come back to it.
The vote on whether or not to raise the debt limit has been pushed out as well. The deadline was approaching quickly; the money was expected to run out around March 31st. But then the Treasury took another look at their accounts receivable (also known as expected tax receipts …which, I suppose, meant they looked down at their ledgers, put a really fine pencil to the numbers, and realized they were underestimating how much wealth they would confiscate from American citizens over the next few weeks…) and announced that the money wouldn’t run out until April! So, as my old friend Kevin Bacon said so memorably toward the end of Animal House: “Remain calm! All is well!”
Why Wait
Hmmm, they’ve delayed the vote on the budget and they’ve delayed the vote on the debt ceiling and a curious boy just has to ask: Why? Why put these things off when the debate is already engaged? Well, one usually puts off a tough decision in the hopes that something else will come along and make it easier. But I can’t imagine what would possibly come along and bring ease to a $1.5 trillion budget deficit, or to the government’s desire to add even more debt to what is already a Ponzi scheme grown so large only Bernie Madoff can make heads or tails of it. There is, however, another reason to put off a tough decision. Sometimes we delay a decision that’s going to negatively affect people until those same people are too busy doing something else to notice. Something so engaging they scarcely feel the rug being pulled out from under them. You often see this with the so-called Friday News Dump; relatively bad news is put out to the press just as they’re going home for the weekend. Gives the dumper a couple days’ news cycles before the dumpee can follow up on whatever was dumped in the first place. But the budget and the debt ceiling are a little too big for that, aren’t they?
It’s almost as if Congress and the administration are waiting for something… an event so big that they can vote to raise the debt ceiling and pass a budget that contains no material cuts. I just wish I could figure out what big event they are pushing everything past…
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Moving Right Along…
In other news, a Day of Rage to protest Saudi Arabia’s government and incite a revolution similar to what is already occurring across the Middle East has been declared for March 11th. It is being closely watched around the world due to Saudi Arabia’s status as de facto leader of the Middle East, as well as being its largest producer of oil. Some are saying that…
Hey, wait a minute. If Saudi Arabia goes up in flames… or even if the protesters fail to ignite anything more than gratitude for not being killed, it’s still going to dominate the news cycle for what: two or three days at least? Gee whiz, I bet something like that would knock a congressional vote over budgets and debt ceilings right off of page one.
I’m not sayin’… I’m just sayin’.
Jeff Brown says:
When the trouble began three weeks ago in Egypt, I predicted downward trending rates. I thought the oil supply/price problem would send investors to our bonds due to the reason the problem existed — so far, so good. According to Yahoo Finance, since I told a few people this opinion, conforming rates have decreased to 4.84% from 5.06%.
I’m not concerned about rising rates with the exception of an ‘event’. In fact, when it comes to rates remaining flat to trending down, my hat hangs more securely on the Euro hook than the oil hook. Once/If the European economic picture worsens, I think it’ll be at that point the flight to our bonds will be more pronounced — and so will the drop in yields.
Your thinking?
March 3, 2011 — 10:05 am
Scott Grace says:
Our interest rates here in Canada just got held steady at 1% thankfully. But today a bank is warning that our home prices are too high(10% above what they were before the recession) and the bubble might burst. Just for comparisons.
March 4, 2011 — 12:30 pm
Sean Purcell says:
@Jeff – not sure if I’m as optimistic as you. March 11th could be an “event” or not. If it is, my guess is that general fear will be stronger than commodity based fear and rates might drop even afterward. But, what are the odds of Saudi Arabia going up in flames? Certainly less than 50%.
As for Europe, I can envision a short lived flight to safety over here when the European economy tanks, but smart money will probably think it through and see Amercia as only a delayed Act II in the same ruinous play rather than a safe harbor. At that point I’d be in precious metals rather than any kind of bond. I think rates go up.
March 4, 2011 — 7:12 pm
Sean Purcell says:
@Scott – rates held to an artificial and artificially low lever, leading to a housing bubble… gee, that does sound kind of familiar.
It’s unfortunate that central bankers don’t learn anything from the mistakes of others.
March 4, 2011 — 7:13 pm