How a buckle in the earth’s crust halfway across the globe and a Tunisian fruit vendor setting himself on fire in an act of protest set off a chain of events that dropped mortgage rates in the United States.
If you haven’t noticed, mortgage rates have improved by about .5% in the last month, with best-case 30 year fixed rates now closer to 4.5% than 5% for most borrowers.
That’s a healthy drop – especially for a mortgage rate market that has been trending higher since early November, 2011.
The recent drop in Mortgage Rates may be short lived – here’s why:
The plunge in rates has everything to do with what market insiders call a flight to quality: When there is trouble (economic or otherwise) investors pull money out of investments seen as risky and seek out safer investments with lower rates of return.
In other words, like a ship seeking a safe harbor (saving the Ship is what matters – after the storm passes the vessel can be put to better use,) during a crisis, investors care more about return of capital than return on capital.
And between ongoing events in Japan, the Middle East, and a still-smoldering possible financial crisis in Europe, finding a safe place to park money has been like an international game of high-stakes whack-a-mole. The sums of money involved are huge.
Which brings us back home.
The safest place to park vast sums of money happens to be in US based, dollar denominated investments. Mostly this money goes into United States Treasury debt (the closest thing to a risk free investment this planet has to offer,) such as bonds, notes and bills.
But not ALL the safety seeking money goes into Treasury debt – there’s a spillover effect - some money inevitably goes into corporate bonds and into mortgage-backed bonds. And when there are more buyers for treasury, or mortgage or corporate bonds, the prices on those bonds rise, causing yields, or rates to fall.
The end result of all this action? 3M can borrow money more cheaply. The taxpayers get a better deal on money borrowed by Uncle Sam. YOU get a better mortgage rate.
Rates could start rising again sooner than you think. The “flight-to-quality” effect is usually short-lived.
While Nobody knows what, precisely, the short or long term economic impact of events in Japan, or the Mid-East, or Europe, will be, rest assured that as events unfold, the moment fear subsides and investors start seeking risk again, the plunge in rates we’ve seen may vanish just as quickly as it appeared.
Could be in 6 months, could be next week, so plan accordingly.