We usually think of mortgage news as something near and immediate, events which may influence our decisions regarding whether to finance or refinance.
Mortgage News from Abroad
How then do we account for the recent news from Europe? Investors have just loaned Germany $4 billion with the absolute and certain knowledge that they will not make a dime. In fact, they will lose money. Twice.
Why would sane people loan money at a loss?
The new financing for Germany -- and another financial powerhouse, Japan -- carries what is called negative interest. This means instead of an interest rate of, say four percent, the loan has a rate of less than zero.
The low rate is one way that investors will lose on this deal but there is also a second trap: The investors will be repaid over time. With inflation, their money will buy less in the future, meaning their buying power will decline. That's a huge problem because it is buying power and not some motley collection of bills that represents real wealth.
As an example, several years ago I had a very fine dinner in Romania. The cost was roughly 500,000 old lei. That's sure a lot of zeros and a big wad of bills but the buying power was not very impressive: At the exchange rate in effect at the time 500,000 old lei were worth about $14.
Mortgage News at Home
The news from Europe raises a question: If a financial powerhouse such as Germany can borrow money with negative interest, why not the US?
If you've been following the mortgage news for the past few years, you know that one of the most common stories concerns interest rates, especially speculation regarding the moment when mortgage rates would once-again begin to rise. Many economists predicted we would see five percent rates in 2014; it didn't happen and despite a repeat of such predictions so far 2015 has seen nothing but mortgage rates for 30-year financing below four percent.
Those who would like to see higher rates were no doubt shocked during the past few days when they heard the comment of David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.
"The housing recovery is faltering," said Blitzer. "While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession. The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence."
Rates were supposed to rise when the Fed ended its quantitative easing program -- and while rates rose on the rumor of an end to the program, they declined once the termination became real and actually took place later in 2014.
Rates were also supposed to go up with increased home sales, but that hasn't happened, in part because existing home sales actually fell 3.1 percent last year.
Despite complex predictions and mathematical models developed by learned economists, the reality is that no one knows where rates are headed. However, there is something we do know: except for savers -- the people terribly harmed by low rates -- a lot of stakeholders are elated with today's interest levels. Those folks include not only mortgage borrowers, car buyers and college students, but also federal and state governments with trillions of dollars in outstanding debt. If rates go up, they would face enormous economic pressures, not a fun prospect for anyone and one very good reason to believe that low mortgage rates will be with us for some time.