China Does It Again; Mortgage Rates Drift Lower

For a newsletter focused on the U.S mortgage and housing markets, we spend a good deal of time discussing foreign events. China, in particular, has been a hot topic. In July, China's major stock markets tanked, which sent investors scurrying for cover. Many sought refuge in U.S. government securities. The 10-year U.S. Treasury note was one of the haven ports.

Over the past couple days, the yield on the 10-year note has again plunged. China is again the reason. 

The People's Bank of China twice devalued its currency, the yuan, in as many days.  This has sent the dollar rising against the yuan, and many other currencies. China devalued its currency in an attempt to stimulate its sluggish economy. China is a huge export nation. When its currency is devalued, exports are cheaper to the country the exports are headed.  Chinese-manufactured goods become cheaper to U.S. and European consumers. 

For us, lower mortgage rates are a by-product of a depreciated yuan. We've seen rates trend lower on the 15-year and 30-year loans over the past couple days. We are now seeing the 30-year loan quoted in the high threes. Up until a couple weeks, it was regularly quoted in the low fours. 

This is the way the world works today: Financial markets are intertwined. Global events impact local markets, and do so more than many people realize. A couple months ago, Greece held center stage; now it is China, and China is much more important than Greece, economically speaking. China is the world's second-largest economy, trailing only the United States. What happens in China impacts everyone, everywhere. Only the United States is more impacting.   

China's currency devaluation impacts us directly because it crimps the Federal Reserve's plans to hike the federal funds rates (which is what people refer to when they talk about the Fed raising rates).  A rate hike would further strengthen the U.S. dollar, thus hurting many U.S. exporters. Therefore, it’s no surprise that markets have trimmed the odds of a September rate hike to zero.  A week ago, it was 50%; two weeks ago, it was 33%.  Now people are gunning for December for the first rate increase.

In short, mortgage rates have been given a reprieve. Whether refinance or purchase, now is the time to act. Sub-4% on the 30-year loan looks like a gift. We say that because the long-term impetus is still for rates to rise, so no one knows how long today's rates will last.  Always keep in mind that sentiment can change in a heartbeat, and it frequently does

Information provided by Jessica Regan.

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