Why the US has a mortgage rate edge
July 18, 2011
Probably the greatest miracle of 2011 is that mortgage rates are not soaring. HSH.com reports that real estate financing remains readily available at less than 5 percent for 30-year, fixed-rate loans.
Why "should" rates be higher?
Well, let's see:
- First, the government may default on the national debt, something unprecedented in our national history.
- Second, a default would make the United States a much more risky place to do business, meaning that foreign investors would want a better return on their capital.
- Third, a better return on investor capital translates into higher mortgage loan rates and steeper costs for cars loans, home equity lines of credit, etc.
And yet there is a reason why U.S. mortgage rates remain low: There is no market of comparable size which represents less risk.
Overseas
You can look at Europe and say that in terms of population and economic heft it's in the same financial league as the U.S., but then you have to wonder about the prospects of Greece, Portugal and Ireland. There are even claims that the economy of Italy is not far from instability, a remarkable thought given the size and importance of the Italian economy.
Or you could look at the cash-rich nations in the Middle East. The building spree in several Middle Eastern states is remarkable, both architecturally and economically. Moreover, the sovereign funds of several countries in the region are among the largest in the world. But then there is the little matter of the Arab Spring and no sense of where it will end, which countries in the area may be destabilized or which leaders will soon flee.
Japan, of course, has been in the doldrums since the 1980s and must now deal with the impact of an earthquake, tsunami and multiple nuclear meltdowns. And China, the world's new manufacturing powerhouse, may well be facing a bout of inflation. That's not very good in a country where there is an urban elite and a vast and often impoverished rural population.
And so we come back to the United States. The truth is that we are the beneficiary of an economic standing which is available to no other country. It serves us well.
A bad bet
However, if the U.S. defaults on our debts the impact will be very quick and very bad. A lot of foreign capital will no longer be available to us. There is no possibility that the best mortgage rates will not quickly rise.
For those with fixed-rate home loans this is not a big problem in the sense of mortgage financing. Home equity lines of credit and adjustable-rate mortgages (ARMs) will have a different outcome. Monthly costs will rise if not soar as quickly as caps and limits allow. Marginal borrowers will default. With more defaults there will be more foreclosures. More foreclosures will push down home values. A mortgage refinance will be a costly and complex event. Even those who have mortgage-free homes will suffer. State property tax revenues will drop as home values decline, services will be curtailed and local government workers will be fired.
It is argued in some quarters that a default by Uncle Sam is not really a big deal, that the results will be far less worse than suggested.
Do we really want to test the theory that a government default would not have major financial implications? The penalties for being wrong are unprecedented.
Right now we have the good fortune of being a better financial bet than a lot of alternative markets. Let's not press out luck.
