Why More Talk Of Recession Makes Mortgage Rates Fall
As many people predicted, Americans really did spend less this past Holiday Season and now mortgage rates are falling because of it.
Weak receipts in December capped off a year in which consumer spending posted its slowest year-over-year growth since 2002.
Because consumer spending makes up two-thirds of the economy, this sort of marked slowdown has farther-reaching implications thanjust at the cash register for U.S. retailers.
Let’s do a quick flashback to mid-October 2007.
At that time, markets were fearful of runaway growth. Mortgage rates were rising and the word “recession” was hardly mentioned in the press. Contrast that to today. Markets are fearful of a complete economic shutdown.
The question most often raised is not “when will the recession start?”, but “how far into the recession are we already?”
This shift in expectations is the biggest reason why mortgage rates have dipped recently.
A weak economy implies slow business growth and when business are not projected to grow, investors prefer “safer”, fixed
returns oninvestments. Bonds can provide that at times when compared to the riskier, variable return on stocks.
In the bond market, it’s the price of mortgage-backed bonds that “set” the mortgage rates for people like us; the two move inopposite directions.
So, as investors seek safety for their money, the higher demand (and subsequent higher price) for mortgage bonds pushes mortgagerates down.
Now, it’s important to note that this bond market movement is happening independent of the Federal Reserve and the Fed Funds Rate.
The FFR is a separate financial instrument that the Federal Reserve uses to speed up or slow down the economy.
When it wants to stimulate economic growth, the Fed lowers the Fed Funds Rate. When it wants to retard economic growth, the Fed raises the Fed Funds Rate.
That mortgage rates are falling at the same time analysts are calling for drastic cuts to the Fed Funds Rate is more than just coincidence, though. Both are the natural result of economic weakness.
(Images courtesy: Fire Finance, New York Times)
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