Interest rate Sensitivity; how sensitive are we to increased interest rates Today vs. 1980?
People often ask me:
Will rates go up? "Yes, they will. eventually."
Will rates go down? "Yes, they will. eventually."
Rates will always go up and they will always come down however "timing is everything!" Interest rate projections are best answered by reviewing long term trends. The trendline over the last three years, has been quite variable at best. The variability, can be credited to the US President, known as the "disrupter of markets." Mr. Trump at random conveys messages about tax cuts, rate cuts, and information about trade deals, like the USMCA (NAFA), EU, Japan, Britain and China (the trade war) all effecting the markets.
Today the bond yield was as high as 1.74% (increasing due to the recent agreement between USA and China). On November 29, 2019 the bond yield was 1.489%. The bond yield has increased by 25basis points in a matter of 25 days. This is a dramatic swing, for such a short period of time, and also explains the recent mortgage rate increase.
What do bond yields indicate for the future? In general terms, the market is pricing in a future interest rate increase by the Federal Reserve, mainly due to a positive outlook about the US economy, based on a partial agreement between China and the USA.
Will the trade war eventually end? Maybe, hard to say when, however ending it is in the best interests of China and USA. If the USA and China come to a fair agreement the consensus is the world economy will take off in an upward trajectory and interest rates will follow.
The average consumer today is very sensitive to rate increases much more than in previous years. Back in the early 80's rates peaked at about 21%. Back then rates basically went up by 10% or doubled in a matter of a few months, and many people lost their homes, due to the huge swing, in a short period of time.
People today often ask. Will rates every get back to those levels? I will never say never, but 21% is highly unlikely.
Today's situation is just as precarious as it was in the 80's. The current environment brandishes loose monetary policy, a Liberal (spend friendly) minority government, rising separatist awareness in Quebec, growing (extreme) deficits on Provincial and Federal levels. All this combined can result in serious consequences.
Let's have a look at how sensitive we actually are to interest rates.
How much would your payment increase if mortgage rates went up by:
1% the average consumer would pay 12% more
2% the average consumer would pay 19% more
3% the average, consumer would pay 22% more
I feel it is important to understand the markets, how and why they move. Knowing the current state Local, National and International markets, will help you to make informed decision. Knowledge is power!
If you or anyone you know, would like to know more and receive solid advice, give me a call 403-813-2769.
I am always available bore you to the point of sleep! I can talk your ear off about rates, trends, yields, coefficients, opportunity costs, utility. :) I am always available to discuss your future mortgage plans.