A Pivot
It is an amazing turn of events that we have experienced in the last four months. There was near universal expectation for the US Federal Reserve (FED) to hike rates three or more times in 2019. Instead, the FED’s tone changed dramatically last December and most analysts now anticipate zero or one rate hike this year (one bank, RBC, anticipates three though). Due to this, mortgage rates have come down as much as half of a percent. For home owners who had just recently purchased a home, this is a great opportunity to lower the mortgage payments or switch to a fixed rate. And for home buyers, it’s an opportunity to move into a price range that seemed to be just out of reach a few months ago.
Mortgage Lenders have come out with a number of interesting new programs which allows for ‘alternative’ ways to document income. The law still requires lenders to document the borrower’s ability to repay the mortgage. That has not changed. For many self-employed individuals though it has been hard the square the challenge of minimizing tax liabilities with buying the home or investment property they know they can afford. These new programs are more flexible in the type of documentation needed to document income. Using business and/or personal bank statements in one alternative way but not the only. Good to excellent credit is needed and rates are higher, but not massively so. The number of programs available has increase significantly which has held the rate premium in relative check.
While I’m cautiously optimistic about the near and midterm, I cannot but wonder when our massive US budget deficit is going to bite and push interest rates higher, even if the FED lower their rates again. Higher risk will demand higher rates for buyers of US treasuries pushing the cost of government debt higher, which will create all sorts of other challenges.
And by the way…
The relationship between the FED and mortgage rates is a bit confusing. The FED does not set interest rates for home mortgages, rather they set the interest rate for banks to borrow money from it. The FEDs policy decisions on rates however has a big but indirect impact on the US Treasury Bond rates and Mortgage Backed Securities (MBS) market rates. It is the US Treasury rate market (the rates the US Government pays to borrow money) and through it the MBS market that the FED’s impacts on mortgage rates is felt. So, the relationship between the FED and mortgage rates is indirect. Sometimes, the FED raises rates and the actual mortgage rates go down in the short term. The best gage to anticipate mortgage rates is the 10 year US Treasury rate. They rarely diverge.
-Stephan
by Author, March. 20, 2019