Weekly Rate & Market Update 10-21-16
Question: What impact will the election have on interest rates?
Answer: Here I go grabbing the third rail of marketing…never discuss politics nor religion…
Some background, I have a Bachelor of Arts degree in Economics and Political Studies and have been active in continuing my education in both disciplines since receiving my degree in 1984. A bit of a news junkie and not afraid to be labeled an econ nerd, I have always read books, articles, columns, stories on economics and politics through history and modern times. Not trying suggest I am an expert, however I have a pretty good breadth of knowledge of economics and politics and how they interact.
The questionable bona fides established, let’s answer the question I have been asked several times over the current election cycle—which started in 2012 it seems.
When people ask about “the election” invariably they mean the Presidential election, so I will address the question as, “what impact will either a Clinton or Trump victory have on interest rates?”
The short answer is: no matter who is elected the impact on interest rates will be about the same, that is to say negligible. There are many charts available that show one party or the other has bigger impact on stock markets, and like with any statistics it depends on what years are used in the study, including what years are omitted. In looking at the charts with different starting points my opinion is that Congress has a greater impact on interest rates than Presidents. Because of this whoever is sworn in as our 45th President on January 20th will most likely have less impact than those sworn into office on Capitol Hill as members of the 115th Congress, and even more impactful will be those sworn into the House rather than those in the Senate.
Congress controls the purse of America, is responsible for the budget and approving expenditures. How the federal government spends tax revenues, what it decides to tax and at what rates and how much it borrows has significantly more impact on interest rates than appointments of judges, ambassadors and members of cabinet members.
Presidential policy can have an impact on America’s purse as a result of working with or against Congress, i.e. approving spending bills or vetoing them, but per the Constitution the President does not initiate any legislation.
What will have an impact on interest rates during the term of our 45th President is the overall economy, which is already on a course that neither Clinton nor Trump will have any impact on for at minimum six to seven months after one or the other is sworn in—and then only as a result of being able to get Congress to pass whatever spending and/or tax bills they support and have presented by amicable members of the House.
As I look at the economy it is my opinion, shared by some and disagreed with by others, that our next President is inheriting an economy that will likely go into recession by late spring or early summer 2017. Regular readers of the Weekly Rate & Market Update who follow the section on economic data know that our economy has had very anemic growth since the recession ended in June 2009. Although how anemic is hard to gauge since the way the Bureau of Economic Analysis (BEA) calculates GDP has undergone two major revisions in the past few years, once in 2013 and again in 2015. After each revision by the BEA past GDP calculations were revised upward.
As with the pre-recession economy much of the growth and strength has been due to a strong housing market that has seen sales and prices climb for the past several years. If/when the housing market cools, and how cool it gets, will impact economic growth and would aid, abet or help start a recession.
While anemic economic growth and job growth that has not had corresponding increase in wages and salaries as increasing percentage of jobs added to the economy are lower wage and hours, have had economy hovering just above zero growth for some time, those factors are not the only reasons we will see our economy go into a recession. The global economy has been struggling for quite a while. Interest rates for many of our trading partners are hovering around zero, and in the case of some countries rates are below zero—you have to pay the bank to hold your money.
America has never entered into a recession due to outside economic pressures, proud to say our recessions are Made In America. That may/will not be the case with our next recession as the challenges facing Europe and China, yes China which has been reporting suspect economic figures for many years, could start a global recession and drag the United States along.
As you consider a recession remember it is defined as two or more quarters with negative growth, i.e. contraction, in the economy. Because our economy is not flying along my opinion of a pending recession sometime in early 2017 is that it will not be very deep, certainly not like our last recession, and depending on foreign market should not last very long. The impact of the recession on interest rates will be that they do not change very much, meaning there is not a lot of room for them to drop, but also will keep a lid on rate increases through 2017 and into 2018.
So home loan mortgage rate in the near future be decided by Clinton or Trump? Most likely not.
Sidebar: While national elections consume electronic, print and social media, most people are less impacted by elections the further they are from your own community—despite the attention they receive. Local elections for city councils and mayor have a much greater impact on your daily life than who will reside in the White House.
Who fixes the sidewalk in front of your house? Determines cost to park in business and shopping districts? Manages animal control? Provides the police to protect your neighborhood and fire department to protect your home and office? Sets fees for business licenses and zones what type of commerce can happen where? Not the President, member of Congress nor Governor.
As you move up the level of elected officials from city to county to state to federal the impact on your daily life declines proportionally, so while who is our President is important to our nation, who is your local representative is even more important to your daily quality of life. And as a bonus you are much more likely to be able to meet and know your local representatives.
This election has been nasty, and not just the campaigns from those seeking your vote, I have seen too many nasty and hurtful posts and comments on social media—many much worse than either candidate has uttered—that has resulted in broken friendships and mistrust that will linger for years. No matter who wins on November 8th the sun will rise on November 9th and every November 9th for several millennia. Every election since Jefferson and Adams has had ardent supporters bashing opponents—and in many elections far worse than what we have seen in this one—it is the beauty and curse of that First Amendment, and as we continued as the greatest nation on earth despite or because of who has been elected in those prior election so we shall continue after our 45th President is sworn in, and our 46th, 47th, 48th…. End sidebar
As you read and contemplate my thoughts on rates and the economy keep in mind the cliché about economics and economists who are hard to pin down due to the famous, “on the one hand…on the other hand…” There is always the “other hand” and contrary opinion and someone will be right and someone else wrong. I just happen to think my hand is right!
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
You paid a little more for goods and services in September than you did in August. The Consumer Price Index for September increased 0.3% for all goods and services, but only 0.1% when food and energy are stripped out of the index (called the “core” index, which is gauge Fed uses for inflation). Year over year CPI is up 1.5% and the core index has risen 2.2%. Despite the annual price increase of 1.5% the government has established the cost of living adjustment for 2017 for Social Security payments at 0.3%, which means for every $100 someone received in Social Secruity benefits in 2016 they will receive $100.30 (or $1003 for every $1000 received in 2016). The CPI news has neutral impact on mortgage rates, it was within the consensus range so investors were not surprised and validated the common wisdom that the Fed will not increase rates prior to the election at its meetings November 1st and 2nd.
Existing home sales remain strong. Mortgage rates are flat for the week with a bit more pressure for lower rates through the week than higher rates as Mortgage Backed Securities floated a bit higher, but not enough to have impact on lender rate sheets. Rates are fantastic and there is more risk if they break higher than any benefit from them going slightly lower, if you are risk averse (and you should be with your monthly housing payment) lock your rate when you can.
Rates for Friday October 21, 2016:
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.
Note and adjustment to the chart for FHA, my data entry was corrected to show drop in FHA rate several weeks ago.
I know many readers enjoy this personal section of the Weekly Rate & Market Update and today I was intending to write about my love of fall and October in particular. However last night I learned through social media of the sudden passing of someone who as I reflected on how she entered my life what a tremendous impact she had on my life, the biggest impact in fact—and never knew it.
On Wednesday night Kathy Soule who has been an escrow officer in the local area for several decades passed away unexpected. She leaves behind her husband Ed and two daughters, Niki and Dani. I met Kathy through her husband who I worked with for a few years. Through Ed I was introduced not only to Kathy but also her the escrow company where she worked. The owner of that company, which today is Cardinal Escrow, Nancy Glass. Nancy was very active in the Greater Long Beach Association of Realtors and had bugged me to come help with a fundraiser. I went by her office after work one night to talk about the upcoming festival, she had convinced me to put on a Batman costume and entertain the kids, and pick up my costume. When I got there several people were making signs, and getting ready for the event. On the floor was a cute girl drawing a sign for hot dog sales. This boy said, “hey, nice hot dog!”
Those were the first words I spoke to Leslie McCormick, now Leslie Smith. Nancy introduced us and there began a rather lengthy attempt at courtship by yours truly and ultimately was successful as evidenced by our 22 plus years of marriage and our two beautiful daughters.
Fate, kismet, destiny, Providence, luck, happenstance, whatever the word, put the people in my path, and Leslie’s, so that we would meet and marry. Kathy was a critical part of that path for me.
Were it not for Kathy’s tremendous laugh, beautiful smile, at times mischievous look and especially her warm and welcoming personality I may not have been as likely to wanted to do business with her and missed the opportunity for Nancy to get me involved in a Batman costume and ultimately the pretty, smart and witty girl drawing a hot dog poster.
Prayers for Ed, Niki, Dani and all Kathy’s family and friends, a wonderfully fun and life-loving woman was tragically taken from them.
Have a great week,
Dennis
