For anyone watching the markets, it has been quite the ride. I’m feeling a bit seasick from all the motion taking place in the markets! Stocks plummet then come roaring back all within the same day. What is going on? As stocks are swooning so are 10-year treasuries which directly impact commercial and residential mortgage rates. With all the market drama what should you do (or not do)?
Why the volatility?
At the end of economic cycles volatility tends to creep up. This is what we are seeing now; expectations on earnings were so high and priced into stock prices and now these expectations are not coming to fruition. Unfortunately, many of the expectations were far fetched anyway and never could have come true even under ideal circumstances. The market is now beginning to price in more realistic expectations of future earnings and therefore “correcting”.
What about bonds?
Bonds typically move in inverse to stocks. So as stocks decline there will be a “flight to quality “assets. Whenever volatility picks up and prices make large moves, government bonds are the go-to asset. As demand increases prices will also increase. Remember, bond prices move in inverse to yields so as bond prices increase yields subsequently fall.
Impact on mortgages:
Mortgage rates typically follow the 10-year treasury. As bond prices increase due to market volatility, yields will decrease. This will ultimately flow through and mortgage rates will also subsequently decline.
What should you do?
With treasury yields having large swings daily, it is difficult to time a “bottom”. If you are buying real estate, do not lock into any long-term rates at this point. The best bet would be to do a short-term ARM (adjustable rate mortgage) with the knowledge that rates likely will tick up in the short term. Over the long run, volatility will subside as we enter another cycle which will provide an opportunity to lock in at a lower rate. For example, you might do a 3/1 ARM until the market settles.
Will rates impact real estate sales?
Currently the fast uptick in treasury has caused the 30-year mortgage to top 5%; this has drastically slowed down sales in many higher end price points as payments subsequently increased. The uptick in rates has made many properties unaffordable for many buyers as their income has not increased fast enough to absorb the spike in payments. We have yet to see how these factors might impact real estate sales.
Rates should come down a little as the stock market continues its gyrations. Unfortunately, one of the byproducts of volatility is a loss in consumer confidence. As perception of the economy begins to shift due to the volatility, consumers are reticent to make larger purchases. We saw this in the last cycle and will surely see this again. In a nutshell the decline in consumer confidence will offset any optimism in lower rates. This will lead to sales declining through the end of the year as the market continues to adjust.
The recent volatility is a tell-tale sign of a “change” coming to the economy. The current volatility is a low rumble of change afoot; the million-dollar question is will this turn into a roar or is this just a little bump that we barely notice? Regardless of the ultimate outcome, with the market uncertainty, now is a good time to avoid any long term mortgage commitments and instead focus on short term “hedges” like an ARM until we get better indication of whether the roar or rumble will ultimately prevail.
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