There are rumors that half of Wall Street had to visit emergency rooms this past month. They were all suffering from motion sickness … and what a wild ride it has become. First, we had worries about the European debt crisis which weighed on stocks. Then, we moved to a stock market rally which gave some optimism that the soft patch of growth was ending. This did not last long because of the budget standoff which took the wind out of the market’s sails. The standoff came too late and was weak, as the markets were not really impressed. Neither was Standard & Poor’s which took one business day to downgrade our nation’s credit, and subsequently, the Dow dropped 600 points.
One business day later, the Federal Reserve Board (FRB) was meeting. Unfortunately, the Fed had used up most of its bullets to fight the slow economy. So what could they do? They declared a free pass from high rates forever and ever, which in “Fed-speak,” is two years. Since the Fed rarely puts a timeframe on the direction of rates, two years is indeed infinity for them. The Dow then rallied 400 points.
The next day, worries about Europe returned, and many realized that the Fed was really saying is that growth was too weak to bring down unemployment or fix housing. The Dow plummets 500 points. The beginning of August re-defined the term roller-coaster. But the next question is … where do we go from here?
First let’s look at the scorecard. The stock market had undergone a 20 percent correction in a matter of a few weeks by Aug. 22. Oil prices fell around 20 percent. Rates were also down significantly with mortgages again hitting record lows set last year. Of course, gold was up significantly. Why do I say “of course?” Well, seems that no matter what happens, gold only goes in one direction in the past few years—and that direction is up. No one is blinking because the market could reverse itself overnight.
Why would rates go down if the S&P downgraded our credit? Didn’t analysts say that rates would go up? Well, unlike a company or even another country, America is a bastion of safety. There are two major places to turn for safety, U.S. Treasuries or gold. Rates went down because the volatility and uncertainty scared investors and they bought Treasuries (and gold). Now, it should be noted that mortgages right now are far from a bastion of safety. Though the rates on mortgages went down as Treasuries rallied, they did not go down quite as fast. That means that the spread between mortgages and Treasuries widened. You may not notice it because rates were moving down so fast. The question is, did the spreads widen because of the precipitous drop in Treasury yields, because of the downgrade or a bit of both?
Any wider spread between Treasuries and mortgages would actually mean that mortgage rates have risen. Now that is a tough one to explain when they are going down. However, it will be noticeable when rates go up, and if we don’t become fiscally sound enough to warrant a AAA rating. I am not saying when they are going up, but eventually, they will.
Didn’t I just say the Fed stated that rates would not rise? It should be noted that the Fed controls short-term rates directly and long-term rates indirectly. Even with the Fed holding short-term rates low, if the economy does start to heat up, long-term borrowing costs will rise, regardless of the Fed's efforts. As a matter of fact, if the Fed leaves short-term rates low in the face of a recovery, long-term rates are likely to rise even faster. So the next question is—is the recovery ever going to happen?
The Fed definitely acknowledged that the economy was growing too slowly and that there is more risk to the downside at the present time. One factor after another has affected the economy's performance, from earthquakes to floods to the European debt crisis. Now budget cuts stand to take some more air out of the recovery. Many are asking if we are heading for another financial meltdown. "Not likely" say most analysts. This is not 2008. The economy is growing, albeit slowly. We added only 100,000 jobs in July, but it was better than the hundreds of thousands we were losing each month just a few years ago. Companies, including many banks, are flush with cash and have the ability to hire as soon as it is evident that the economy will not fall back into recession. The risk of a double-dip recession has risen, but is far from probable.
So, we get back to the question: Where do we go from here? On the positive side, lower rates will increase refinancing and home purchases. Lower oil prices will enable the consumer to increase spending in other areas. On the negative side, we have the European debt crisis and a spooked stock market. Remember, this is a crisis of confidence and roller coasters get people scared rather than give them confidence.
If rates stay where they are for a few months, what has been a trying year for mortgage bankers could turn into a much better one as the refis line up. If you are not reaching out to your sphere right now, you should be. Anyone who wants a refinance letter to send to their clients, just e-mail [email protected]
and we will send you a copy. On the other hand, don’t blink because the latest refi boom-ette could be over in a second. Anyone out there know how to control a yo-yo?
Dave Hershman is a leading author for the mortgage industry, with eight books and several hundred articles to his credit. He is also a top industry speaker. If you would like to stay ahead of what is happening in the markets, visit www.ratelink.originationpro.com for a free trial. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com and he may be contacted by e-mail at [email protected]