Pretty crazy to think of a small task like using an iPhone or a Windows computer is increasing your mortgage rates. How can a computer or phone have any impact on rates? Apple, Microsoft, and Google are the largest holders of offshore cash piles. Under the new law many companies will “repatriate” the cash to bring it back to the US.
Large Overseas Cash Hoards
Many companies kept large cash hordes overseas to minimize their US tax liabilities. Much of the cash held overseas by Apple, Microsoft, and Google is in US treasuries. Estimates put the amount of cash held offshore at close to 3.1 trillion dollars (source Bloomberg).
Incentive to Repatriate Overseas Cash
The new tax bill provides an incentive for companies with large offshore holdings to bring the cash back to the US. “There is going to be a significant unloading,” particularly of Treasuries, said Reuven Avi-Yonah, a professor who specializes in corporate and international taxation at the University of Michigan Law School. (Bloomberg).
Impact on Treasuries
Many companies will be selling off a large amount of US Treasuries since they can typically get higher returns with their cash by buying back shares, investing in new businesses/technology, etc… As more supply enters the market prices will fall. At the same time companies are increasing the supply by selling Treasuries, the U.S. government is also increasing the supply as the deficit spending continues (to raise funds for the deficit Treasuries are sold). As supply increases prices will fall. Remember that Treasuries move in inverse, so the lower the price, the higher the interest rate (yield). All this selling will increase interest rates on long-term treasuries.
Impact on Mortgages
Mortgage rates (or any long-term rates) are not set by the federal reserve. Long-term rates are market driven. Longer term mortgage rates are pegged off the 10-year treasury. As mentioned above, treasury yields will rise due to the large repatriation of cash and subsequent selling by various companies while at the same time supply continues to rise with the deficit. This means mortgage interest rates will be going up at least in the short term due to these factors.
What should you do?
Stop using your iPhone! Just kidding; unfortunately, there is not much you can do since the market is already factoring the repatriation into long term yield prices as treasuries have started to trend significantly higher recently. Mortgage rates will continue trending higher as well, at least in the short term.
Fortunately, this should be a short-lived phenomenon as companies repatriate their cash. Once the repatriation is completed treasuries and in turn rates should stabilize. I would not lock into a long-term rate today as there should be an opportunity for lower rates in the next 24 months as the repatriation wraps up and the economy begins another economic cycle. So, don’t worry you can keep using Google, your iPhone, and Windows without making mortgage rates skyrocket forever.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).