Government Shutdown And What It Means For Mortgage Rates

homes1006_2Jonathan Kutsmeda
CEO, Hawaii Mortgage Central

The federal shutdown went into effect this week because lawmakers have not reached an agreement on spending cuts necessary to avoid a default. In other words, the United States will run out of money unless decisive action is taken. To postpone this catastrophe, the government is minimizing current expenses by temporarily suspending certain public services until a resolution can be made. The shutdown will negatively affect the economy as well as impact mortgage rates.

To understand the potential effects the shutdown could have on mortgage rates, it’s important to know how rates are calculated and what market events cause them to rise and fall. The majority of all mortgage rates are a result of the Mortgage Bond Market, which is publicly traded and therefore behaves just like the stock market. Essentially, mortgage rates are directly linked to the price of bonds. As more bonds are purchased, the price increases and inversely interest rates decrease. Rates are not controlled by the government. However, the Federal Reserve can establish certain policies that influence interest rates through the trading of bonds. For example, Quantitative Easing is a Federal Reserve program in effect today.

Since October 2012, the Federal Reserve has been buying $40 billion of mortgage bonds each month, part of a program currently referred to as QE3. There is a strong correlation between QE3 and the record low mortgage rates of last year, but it’s not the only cause. Retail and institutional investors, such as insurance companies and pension funds, also buy bonds to minimize risk during uncertain times. Therefore, negative economic news or data influences the purchase of bonds and as a result rates decline.

In 2011, the market experienced a major shift as investors turned to the safety of bond purchases following the news of a looming Greece default. The sudden rally in bond markets served as a catalyst for the precipitous decline in interest rates two years ago. The Government shutdown is expected to have a very similar effect.

Hawaii Mortgage Central closely monitors all market conditions and has successfully positioned our clients ahead of these rate changes each time before they happened.

homes1006_3We work closely with each of our clients to determine their unique financial goals and by leveraging this advanced market knowledge help advise them on the economic horizon in order to secure the best possible rate to meet these goals.

The current federal shutdown is the beginning of events both domestically and internationally that will impact markets throughout the remainder of the year into 2014. Timing is critical, and many borrowers have seen rates rise unexpectedly this summer as the Federal Reserve suggested that they would “taper,” or reduce the amount of bonds purchased each month. However, over the past three years, interest rates have maintained an overall downward trend. The sudden increase in rates recently can be directly attributed to the speculation of the taper and is no worse than other shifts in rates we’ve experienced during this time. With the Government shutdown, and the Federal Reserve currently postponing any reduction in asset purchases, bond markets have started to recover and rates are returning to lower levels. Although there are many factors to consider, we have a thorough case for why this trend should continue and how you can position yourself to benefit at just the right time.

Hawaii Mortgage Central is committed to helping our clients capitalize on the constantly changing market in order to secure the best possible rate, whether purchasing a new home or refinancing. As an industry leader in market forecasting and the best priced lender in Hawaii, we combine our market expertise with the best rates to provide unparalleled mortgage solutions.

Hawaii Mortgage Central is your guide to a customized mortgage strategy that helps you achieve your financial goals. Call 808-692-0692 today for a free consultation and to learn more about the current market trends and how you can benefit.

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