Apr 26, 2014
There used to be an appliance manufacturer that claimed its repairmen, or should I say repairpersons, were the loneliest person in town. Of course they were alluding to the reliability of their product, even though it was probably assembled at the same factory as a number of other brands. But I propose that these lonesome employees could very well be dethroned from this solitary title by another group; mortgage originators. In many respects, you would have thought that this would have happened right after the financial meltdown in 2007 that was largely driven by mortgages, but the "extraordinary measures" initiated subsequent to the debacle that drove interest rates down to record low levels provided them with a new model with which to remain active, namely, refinance. Alas, it would appear that this long running party is finally over. The chart that I have included almost does not do us justice as it only plots what 30-year mortgages have done since the last high in 2006/07, but of course we have really been on a downward trajectory since the peak in October 1981 at 18.16%. My wife and I purchased our home in 1983 and were ecstatic that we could find a mortgage at 8 ½ %, but it had to be a float to even find something that reasonable. Well enough of the trip down memory lane.
This topic actually fits in quite well with last weeks’ column and the discussion about the impact that record low interest rates have undoubtedly had on farm real estate values. While they have become a bit "squishy" in some areas, it would appear that the rise in mortgage rates in the housing sector over the past year to this outrageous 4.5% has had a much more dramatic impact. According to data released this past week, for the first quarter of 2014, lenders originated $235 billion in mortgage loans, which is down 58% from a year ago and 23% from the last quarter in 2013. Granted, part of this can be attributed to the harsh winter in the middle of the United States and also a slowdown in refinancing due to the higher rate, but the actual sales figures did not paint a pretty picture either. Sales of previously owned homes in the month of March were down 7.5% from last year and mortgage applications to buy homes were down 19%.
Many economists feel that a healthy and growing housing market is reflective of a healthy and growing economy in general. While it may be premature to call this a trend, it does appear to be a pretty obvious warning flag. An additional problem is that the Fed really does not have much room to try and provide stimulus by lowering rates again, particularly when we are already in a tapering mode. Taken a step further, there may be a debate as when, but I suspect most economists believe that rates will be moving higher, not lower, in the years to come.
Here again, just another one of the conundrums we face when the financial wizards micro-manage the economy through monetary policy. Every move by the managers will produce both good and ill effects, and at some point they all need to balance out and when they do some unfortunate soul(s) will feel the ill effects of the pendulum swing. This is probably a good time for all business to take a serious look at their operations and assess where rising interest rates will negatively impact them the greatest and make decisions or plans now to hedge or reduce that risk.