We are at an interesting crossroads in the economy. The Federal Reserve and economic data show that the economy is very strong with consumer spending and confidence at all-time highs. At the same time the bond market is portraying a different picture after a new survey of purchasing managers declined to the lowest level in 6 years and treasury yields are dropping to fresh lows. Who will win the economic tug of war? Will real estate mortgage rates plunge?
What is in the data?
Concerns about the consequences of the coronavirus rattled stock and bond markets Friday, particularly after a survey of purchasing managers by IHS Markit found that U.S. business output declined in February for the first time in more than six years. The Dow Jones Industrial Average shed 228 points, and the yield on the 30-year Treasury bond sank below the record lows set back in 2016.
Those worries also drove up estimates in futures markets of a Fed rate cut later this year. According to the CME Group, traders envision a roughly 58% likelihood of at least one rate cut by June — up from less than 20% a month ago. The probability of a rate cut looks like it will only increase in the coming weeks due to the rapid change in market sentiment.
Why the change in market sentiment?
The rapid spread of the Coronavirus has led to a huge spike in demand of safe assets and a sell off of riskier assets. The market right now has priced in extremely lofty expectations. Whenever there is even a minor market hiccup the market overreacts, this is typical end of market cycle behavior as everyone is nervous if we are at a top and wants to take profit while the going is still good. The primary driver of the recent selloff is due to the Coronavirus scare and the impact on China and ultimately the world economy which is more intertwined than ever There are allot of variables making investors nervous as nobody has a handle on the true impact yet.
Who wins, the Federal Reserve or the “Market”?
Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, said that financial markets have often proved better predictors of future rate cuts than Fed officials.
“They can talk as mean a game as they want, but when push comes to shove, the Fed has never gone against market expectations for rate hikes or rate cuts,” she said.
What does this mean for interest rates?
Regardless of who wins the short-term battle between the federal reserve and the bond market, long term rates will factor in the uncertainty with lower long-term rates. We are already seeing this now with 10 -year treasury rates dropping 20% from last years highs to 1.51% touching on lows not seen since 2016. With rates continuing to drop/stay in small trading range at a low level, interest rates will reflect these changes with mortgage rates also dropping. I don’t see any impetus that will reverse the mortgage rates plunge.
What should you do?
With the market signaling further cuts in the next 6 months, mortgage rates have further to fall. Now would be a good time to do a shorter-term adjustable rate mortgage for a lower cost than a long-term fixed rate loan to save considerable money. To reduce your monthly payments, look at 3,5, or 7-year products as there will be an opportunity for lower rates in the future so it is not worth it to pay a premium to lock in a long-term rate now.
Summary
The Federal reserve has been vocal in reiterating the strength of the economy, but the market is not buying it and has substantially increased the odds of rate cuts this year from 20% to 60%. More often than not, the market wins the economic tug of war which means the odds of a mortgage rates plunge this year have increased substantially. Now is the time to let if float as there is very little downside risk to an adjustable rate product.
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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 Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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