I've been preaching to the masses that interest rates will be rising soon, only to see them recently drop even lower. While I'm sounding like the proverbial used car salesman, it hasn't been without good reason. Let me explain.
Our government has artificially propped up the mortgage market and kept interest rates low by purchasing $1.25 trillion in mortgage backed securities. What does that mean? It means when mortgages are signed and agreements are made with banks, those banks 'pool' those mortgages and sell them as 'mortgage backed securities' on Wall Street. Since the 'mortgage meltdown', nobody would touch those with a ten foot pole, so our government stepped in and agreed to purchase them.
If the government didn't buy these, banks would have to entice investors to purchase them by increasing their return. Investors would demand a higher return for what they perceive as risky investments which, in turn would drive mortgage rates much higher, much faster. Since the Fed's stepped in, the free market system hasn't been put to the test for over a year.
Now that the Fed's buying spree has ended, all signs pointed to rising mortgage interest rates, with economic pressures and unemployment numbers not improving. All signs point to higher rates until WHAM.... Greece's economy starts to tank and the threat of France following in their footsteps hits the airwaves.
What does this have to do with US mortgage interest rates? Well, the world has become a much smaller place and, as they say, "we're all in this together". Investors spread their portfolio worldwide. When funds invested in Europe, specifically Greece and France begin to sour, they look for stronger places to put their money. The US bond market still seems to be a safe haven, although yields are low. Therefore, just as we are expecting mortgage rates to rise, we get a sudden influx of interest into our bond system that strengthens the market, keeping rates in check.
So, the instability of the European Union has helped to keep US mortgage interest rates in check. How long will this last? Who knows? One thing is for sure... if there's one thing we can always count on, it's change!
