So, I was on John Harper’s NRVLive show this morning and I have to say that even I confused myself.
John asked me what effect the talk of recession was having on mortgage rates, and I said something that sounded like this … “Uhm, see, what had happened was …”. I could blame my inability to produce a clear thought on any number of things – the parking lot was icy, or that John was doing the show from his house instead of the studio because of the weather … maybe it was that banana I had for breakfast.
Here’s what I MEANT to say …
Yes John, great question! When you look back at receipts for December, you can see that we spent less in the last month of the year than we had since 2002. Consumer spending is a huge part of our economy – making up somewhere in the neighborhood of 67% of our economy. A slowdown in consumer spending has a far-reaching effect, certainly.
Six months ago, the people in the know were screaming that we were poised for runaway growth. What did rates do? They rose, and they kept on rising, eventually pushing the 6.5-7% threshold. Now, as talk of a recession has started creeping into the news, what did rates do last week?
They dropped. Significantly. 30-year fixed rates, with no points, were being quoted late last week at 5.25%. 15-year fixed rates with no points were quoted as LOW AS 4.75%!
When the economy is slow, investors often look for safe, fixed returns, like bonds. Bonds and mortgage rates are similar to a seesaw - bonds move in the opposite direction of mortgage rates, so in a slow economy when investors are looking for safe returns on bonds, mortgage rates should drop. When bonds aren’t as popular, mortgage rates move up.
So all this talk about the Fed dropping rates doesn’t mean a whole hill of beans, really. Dropping the Federal Funds Rate improves confidence, sure, but has little to do with mortgage rates. Bonds, however, do, which is why – as the economy slows a bit – we’ll see rates fall.
Seesaw.
The beauty and the fear of live radio is this exact situation. At least you have a blog by which to clarify.
Posted by: Jim Duncan | January 19, 2008 at 06:58 AM