This article is from the Wall Street Journal and talks about the ever low mortgage rates.
Mortgage rates are historically low at 4.12% compared to almost 6% in 2008. One reason for this is the increased exposure of the US banks to the euro zone crisis. As investors are skeptical of the performance of the financial markets, they are turning to safe heavens such as investments in the treasury bonds. As demand for these bonds increase, their prices rise hence the interest rates they offer decreases. As the fixed mortgage rates are related to the yields on these bonds, they also go down.This problem is exacerbated by the fact that the US unemployment rate is still high at almost 9.1% as the economy fails to add more jobs. This means that although the mortgage payments are very low, people just don't have the money to buy houses, hence depressing the level of fixed residential investments which ultimately slows the pace of recovery.
One interesting thing to note here is that although S&P recently downgraded the US credit rating, investors are still content on buying the treasury bonds rather then investing in the housing market which indicates how worse the housing market situation is even after all the attempts by the government.
If this situation continues who knows what is to follow? Will the US economy need another round of quantitative easing to spur growth or will the markets jump back themselves?
The part that mostly intrigued me about this article was that fixed rate mortgages are so closely tied to the yield of 10 year treasury notes because they seem so otherwise unrelated. Knowing that they are related, though, it now makes perfect sense why mortgage rates are now at record lows, and also why that mortgage rate is used as a sort of indicator for the health of the economy. My biggest question, which isn’t addressed in the article, is why are 10 year treasury notes and fixed rate mortgages so closed linked?
ReplyDeleteThe reason why mortgage rates are so closely linked with yield of 10 year note is if a lender chooses to sell your mortgage loan to an investor, the lender will likely use Treasury yields as a benchmark for value. So when bond yields drop, typically, conventional mortgage rates fall as well. Conversely, when yields rise, so do mortgage rates.
ReplyDelete