Let it float!

I’m talking about rates that is.  Why would anyone not lock in a mortgage at these historically low rates.  It is a foregone conclusion that rates will increase in December (more than 80% of economists feel a hike will occur: WSJ).  With such strong convictions of a rate increase, why did rates actually drop this week?

Many people think that rates are actually controlled by the fed.  Unfortunately, this is not accurate.  The fed controls overnight lending rates among the banks.  The vast majority of consumer/business loans are pegged to longer maturity treasuries (10 year treasury or libor).  Both of which are market driven.  The longer term treasuries are driven by inflation, future expectations for the economy and geopolitical events, demand for safe havens, etc.. Which is why this week treasuries rebounded from a 4-month low.  Remember as treasuries rise, yields decrease.  As yields decrease rate pegged to the 10-year treasury would decrease.

So why would you still not lock.  Variable rates are at all-time lows.  There likely will be a small uptick in rates over the next 6 to 12 months, but long term rates likely will remain muted.  There was an interesting article on Bloomberg: Low Rates are here to stay  that discussed the various reasons rates will stay low.  In essence the determining factor in long term rates is the rate of growth in an economy (which in turn should trigger inflation).

The United States economy might have turned a corner towards low growth.  There are two primary factors dragging on growth: the retirement of baby boomers along with lower birth rates.  We can see the best example of this trend with Japan.  The Japanese counterpart to the federal reserve has actually tried negative rates to try to spur growth and force people to spend as opposed to save.  This has done little if anything to increase the Japanese economy (in q2 of this year the Japanese economy grew ZERO: see article: Trading Economics).

The long term trends have all but sealed the fate of the low growth rate environment.  So grab a beverage, hop on the boat and let it float!

References

1. Treasuries Rise this week: Bloomberg
2. Low Rates are here to stay: Bloomberg News
3. Economists expect the next rate hike in December: The Wall Street Journal
4. Japan drops to zero growth: Trading Economics

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).