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Stocks Drop on Chinese Economy News, Mortgage Rates Dip

“Investors who forgot that the U.S. stock market is still tethered to global markets were rudely reminded that it’s a small world after all.” – Barron’s Online

Poor economic data from China caused a large selloff in the U.S. stock market last week. The major indexes – Dow, Nasdaq, and S&P 500 – fell 3%, which was the “biggest weekly selloff” since mid-2012, according to Barron’s. On Friday alone, the Dow Jones Industrial average fell over 300 points.

In 2011 and 2012 U.S. markets felt shocks from issues pertaining to European sovereign debt. Investors reacted to uncertainty surrounding several European governments ability to borrow and repay debt, and the consequences this could have for long-term European Union stability.

To protect themselves from volatility, investors looked for a measure of “safety”, which was found in U.S. bond markets. Mortgage rates fell as demand for the “safe haven” of U.S. bonds increased.

Rate movement correlates to bond market activity (specifically, mortgage-backed security bonds). Periods of high demand in the bond market put downward pressure on rates, and vice versa: as bond prices drop and bond yields rise, mortgage rates jump.

This serves as a reminder that global issues – such as foreign debt default and the pace of Chinese economic growth – can have very real impacts on something as local as a home purchase.

Most recently, mortgage rates have dropped as stocks struggle. Freddie Mac’s 30-year fixed national average fell to 4.39% last week, which was the lowest level since November of 2013. The data does not yet reflect Friday’s stock drop.

The next potential for mortgage rate movement comes on Wednesday, January 29, when the Federal Open Market Committee will adjourn its January meeting – the last of Chairman Ben Bernanke’s term.

Bernanke and the FOMC enacted the long-awaited “tapering” of its stimulus program “quantitative easing” after December’s meeting (2013).

Since the announcement, news of weak December employment and disappointing Chinese economic growth shook financial markets. Will Bernanke stay the course in his final meeting? Expectation currently seems to be that the FOMC will continue to “taper” QE slowly but surely.

Quantitative easing has directly impacted mortgage rates. Prior to its December “taper” decision, the Fed had been purchasing $85 billion per month in bonds ($40 billion in mortgage-backed securities and $45 billion in U.S. Treasuries).

As discussed above, demand in the bond market can push down mortgage rates. The Fed has been ensuring a particularly high level of demand with its bond purchases, and as it slowly leaves the market, mortgage rates will rise as they feel less downward pressure.

Should the Fed reduce the pace of tapering, expect rates to dip further. Should “tapering” continue at its current pace, rates may tick up slightly.

More housing market news:

– New home sales rose by a pace of 4.5% in 2013. Last year, an estimated 428,000 new homes were sold in the U.S. (Reuters┬ávia Yahoo Finance)

– Sales of “distressed” properties (foreclosure and short sales) ticked up as a percentage of total sales in 2013 (CNN) . Locally, this was not the case. Distressed listings accounted for just 17% of all activity in 2013 compared to 33% in 2012 (Keith Byrd).

– Zillow: home values to rise a projected 4.8% percent in 2014 (Zillow)

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile