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2010-07-02 15:50:59

Greece is the Word

The pundits were wrong. Their near-perfect predictions are flopping. Which ones? The ones betting that mortgage rates would surpass the six percent mark as summer approaches. 

Historically, when an economy begins to recover rates begin to rise. Or when the Federal debt load demands the Treasury sell more bonds. Or even when the Fed stopped buying mortgage-backed securities last March. Everyone predicted a sharp rate increase. 
These economic soothsayers try not to be wrong. If they’re wrong too many times they’re not worth much as soothsayers, are they? In fact, this author has predicted rate increases that simply haven’t happened. It just doesn’t make sense that rates are lowest since last January given all the recent economic data.
The Unemployment Report for April showed the biggest job gain in four years. The Purchasing Managers Index which tracks manufacturing orders posted a recent reading of 60.4. Any reading above 50 shows economic growth as factories order more goods. Why did they order more goods? Retail Sales numbers were up, naturally. People are buying more stuff. But everyone was wrong about rates. 
Why did everyone goof this one up? Greece. No one thought Greece’s economy would be going through so much turmoil. The massive debt they’ve accumulated is crushing them. Seeing this, investors around the world are looking at other European countries to see if they, too, could be in a similar financial quagmire. 
In times of uncertainty, investors typically pull their funds out of stocks and into safer vehicles, and some of the safest just happen to be U.S. bonds, treasuries and yes, mortgage-backed securities. It’s the latter of these three that is enjoying new found popularity since the Fed stopped their buying program. Higher demand for these securities translates into lower mortgage rates. So instead of seeing rates approach six percent right now we’re enjoying 30 year fixed rate loans near 4.75 percent.
If you compare a 30 year fixed rate on $350,000 at 5.75 percent, where mortgage rates were headed, with 4.75 percent the difference in payment is $2,042 and $1,825. That’s over $200 per month, widening the pool of potential homeowners due to Greece’s appetite for debt.
Greece’s new austerity program plus an unprecedented infusion of capital from the International Monetary Fund and world governments was thought to have stopped Greece’s freefall. And it did…for about a day. Now investors are looking at the entire European Union for possible signs of other government bailouts. And it’s not too soon to look at other countries and imagine a “what if” scenario that would pull still more investors out of the stock markets seeking shelter.

If in fact this situation lasts for any extended period of time, and it could certainly last well into the fall, you can expect mortgage rates to remain around where they are today.   Let’s just hope Greece’s problems stay overseas…while we enjoy a recovering economy with lower rates.

Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."   

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