Global financial markets continue to be transfixed by drama in Europe, though it is now showing signs of subsiding. That’s good and bad for mortgage markets in the US.
The drama in question centers on Greece. That’s a fact that’s hard to miss if you see any financial news, but what’s really going on and how is it affecting you?
The only reason the world is concerned about Greece is that it’s a member of the Eurozone—the group of 19 countries that use the Euro currency. Thus, their actions affect all other members of the Eurozone. A previous newsletter discussed this dynamic in much greater detail, but here’s the gist of all the Greek drama:
The worse things are for Greece in terms of receiving bailout money and paying its debt, the better it is for interest rates in the US. As such, when Greece took steps to secure more bailout funding this week, the implication for rates has been negative. But the damage was far lighter than we might have expected.
There are several reasons for this. First of all, for Greece, it’s not as simply as “Bailout or no Bailout.” Yes, they’re on track to get the money they need to stay in the Eurozone, but the terms won’t be finalized and fully approved for at least a month. Thing won’t be easy for Greece going forward either—a fact that has critics suggesting a Eurozone exit will remain a looming threat that’s merely been pacified for now. These caveats definitely help lighten the impact on mortgage rates.
Even more important that caveats regarding Greece is the fact that there are so many other sources of motivation for market movement! The media world has a habit of hyperfocusing on the highest drama of the day. Greece fits that bill more than anything else recently, but it’s not necessarily the most important consideration for rates markets.
Case in point, rates clearly benefited from a deterioration in economic data this week. In particular, Retail Sales were much weaker than expected. This is one of the more important economic reports in the US each month. If it suggests consumers aren’t spending, the implication is that growth and inflation won’t justify the Fed’s rate hike stance. Even though the Fed Funds Rate doesn’t directly affect mortgage rates, an economy that justifies a Fed rate hike also typically justifies rising longer term rates (like mortgages). In any event, they tend to move in tandem, and rate hike expectations have definitely been well correlated with mortgage rates.
The Fed is cognizant of the situation. Fed speakers have increasingly mentioned the fact that a rate hike is dependent on data. They’ve also taken note of events overseas with several Fed governors mentioning that they don’t want to add unnecessary market volatility to an already fragile situation in Europe. Their conclusion though, wasn’t so much to hold off on hiking, but rather to make sure it’s well-telegraphed. To that end, most of the Fed hasn’t been shy about saying they still expect the first rate hike in 2015.
The great thing is that markets have already been operating under that assumption! That means that any reconsideration on the part of the Fed—any further deterioration in the economic data—will only lead to improvements in rates. At this point, it would take accelerating improvement in economic data to get the rate environment back on track with the pace of increases seen in the first half of 2015. In other words, rates look like they’re ready to start holding their ground here. Whether that means they rise less quickly, or actually push back lower, it’s too soon to say, but either way, it’s an improvement in the outlook.
The improvement couldn’t come at a better time as housing-related metrics are just gaining traction. So much of the housing recovery has been hampered by a lack of income growth combined with tight guidelines. Income hasn’t been picking up enough, so the market has been reliant on low rates to keep affordability intact for as many potential homeowners as possible.
Guidelines are doing their part, even if the changes come slow, and even if lender implementation has been slower. But they are happening. For instance, Freddie Mac just announced a slew of updates to underwriting guidelines that will help many borrowers who might have had trouble qualifying before. For what it’s worth, these are “make-sense” adjustments that should have happened a long time ago—nothing at all like the proliferation of reckless lending seen in the run-up to the housing collapse.