Is this the beginning of the end to low rates?
By Dave Eshleman
We knew this wouldn’t last forever. We expected rates to start climbing after the election, and climb they have. Thirty-year conforming fixed rate are up about a half per cent since their lows earlier in the year.
But what does the future hold? Will rates continue to rise? Will they level off? Or do we have one more chance at grabbing a low rate before the end of the year?
The Fed announced their intention to begin gradually increasing rates beginning in December, it should come as no surprise that rates would inch up, particularly with tentative signs of an improving economy. But last week’s unexpected election result seems to have kick-started the climb.
We at Finet Mortgage are not alone in our concern about the effects a Trump presidency will have on the economy. The Economist’s Intelligence Unit (EIU) declared that he posed a top-10 risk event that could disrupt the world economy.
Until Trump, the respected global economic and geopolitical analysis firm had never rated a pending election of a candidate to be a geopolitical risk to the U.S. and the world. “It’s highly unusual and I don’t think we have ever done it where we’ve had a single politician be the center of our risk items”, said Robert Powell, global risk briefing manager at EIU.
“Innate hostility within the Republican hierarchy towards Mr. Trump, combined with the inevitable virulent Democratic opposition, will see many of his more radical policies blocked in Congress,” wrote EIU. “But such internal bickering will also undermine the coherence of domestic and foreign policymaking.”
“The prospects for a trade war are quite high” said Powell. “Why is a guy who has many of his goods in China want to start a trade war with China?”
One difficulty in assessing Trump’s policy positions is that “he does tend to shift his opinions like the weather,” Powell said.
The EIU report was released before the election. Now we wait and hope for the best. “But the types of rate increases we’ve seen this week are not sustainable” according to financial guru Peter Karp of Karp Capital Management in San Francisco. “It’s a knee-jerk reaction. There’s uncertainty about the effect that Donald Trump’s stated intention of renegotiating trade deals, closing borders and restricting trade will have on the economy,” Karp commented. “These types of actions are inflationary, but how much is he actually going to be able to accomplish? It’s not so simple”.
In a “normal” world, rates follow the performance of the bond market. In a slow economy, bond rates rise and mortgage rates fall. As the economy improves, money flees the bond market in favor of stocks, and rates rise.
We HOPE the economy continues to improve, and there are encouraging signs, but challenges remain. The low cost of oil, while a boon to drivers, actually puts a damper on the economy. And as long as OPEC and other oil producers fail to cut production, we’ll have another year of relentless supply growth.