This past Friday an economic event took place that few will ever know about. We saw history in the making in the global bond market, with all-time lows in 10-year yields in each of the following countries: Germany, France, Italy, Spain, Netherlands, Portugal, Switzerland and Japan.
What do each of these countries have in common? Slow to negative wage growth and extreme deflationary pressures. These negative economic factors drive interest rates lower because interest rate yields are a reflection of both growth and inflation. Lower yields mean lower borrowing costs aka, low mortgage rates. Good thing right? Wait, there’s more to it.
The reason why the historic implication of last Friday may go unnoticed by most people, is that many have become conditioned to believe weaker growth is a good thing economically. Why? Because it means more central bank “action” to prop of stock markets in the near-term. This means that governments will print more money, adding liquidity (cash) to the system which lowers the interest rates. If the rates are lower the governments can loan themselves more money at lower interest rates. Oh, and yes, lower rates makes stock markets rise and mortgage rates drop. Get it!
If we step away from stock market factors and low mortgage rates, is the race to lower bond yields by global central bankers really a good thing? If you believe that higher short-term stock market prices and rock bottom mortgage rates are great for the economy in of themselves then yes! Unfortunately this is likely not the answer for a healthy financial market. If it were, Japans economy would be booming today as the Japanese stock market moves into higher territory and mortgage rates are at an all-time low. Instead, Japan is starting to slip into its 4th recession since 2008.
As it turns out, creating financial bubbles and asset price inflation (higher stock prices) does not create prosperity for everyone. I don’t expect most banking institutions to admit this any time soon; they are what you call in poker “all in” regarding this policy. And so the push to lower mortgage rates is likely to continue as bankers increasingly compete with one another in the greatest financial experiment in modern history.
Their goal is simple: drive the expected future return on all asset classes much lower or even to negative levels. Yes, you can have negative interest rates on the money you save. This will enable governments around the world to more easily continue borrowing beyond their means and convince people that things are great. In short, it is a policy of borrowing from the future to satisfy the desires of today. This simply delays the financial reforms necessary to generate more reasonable and sustainable growth. Unfortunately our culture here in the United States and other countries is to buy now and pay later. The cost may be greater than we ever expected.
Is this economic policy a good one? Absolutely not, but with stocks at new highs and mortgage rates dropping like a stone don’t expect many complaints. Only after faith in these policies inevitably fade and stocks start going down and mortgage rates start to climb will the blame game begin. Sound familiar? Remember 2006 and the economic implosion, bail outs and property values getting crushed?
So what’s a Berks County home buyer or seller to do in this unpredictable economic climate? There are two things that come to mind. One is to take advantage of the low mortgage rates and buy that home you have been waiting for. This may be a good strategy if you plan to own it for an extended period of time. You may be able to take advantage of locking the lower interest rates for 30 years, bunkering down and watching the show from your dream home with your dream payment. If you are a home seller hold tight and see if the buyers decide to take advantage of these rates, the historically low inventory and even the reduction in fuel costs. The other option is to wait and see what the future may offer. This is known as trying to catch a falling knife.
Maybe it is time to get in, take advantage of, what may be a positive cycle in the local housing market and lowest mortgage rates in history.
Knowledge is power!
Jeffrey C. Hogue
#jeffreyhoguerealtor #knowledgeispower #lowmortgagerates