For the past couple of years all the talk has been about "historically low interest rates" and why more buyers weren't taking advantage of these. Mortgage Backed Securities (MBS) have been trading at all time highs peaking on January 30th of this year. A number of factors go into the pricing of MBS but the simple explanation for the low rates is that the global economy has pretty much been in the tank for a few years. Even as domestic data such as unemployment has shown improvement, uncertainty in Europe has held rates down for the past several months. In fact there were two major factors in keeping rates down:
1. Greece's status inside the European Union and
2. Slow Wage Inflation in the U.S.
Recently Greece and Germany have been at odds about Greece's debt. Their new government has shown no real desire to honor the terms of repayment for the bailout they received from the EU. This battle has led to many European investors parking their money in U.S. Bonds such as MBS. A couple of weeks ago Greece and the EU came to an agreement that provides Greece an additional four months to craft a new agreement, this is a negative for mortgage rates.
The bigger and more important news is that in January, for the first time in years the U.S. saw a jump in average hourly wages for non-farm payrolls. The unemployment data tends to be what the politicians would point to in terms of the rate of economic growth but average wage is the main driver. The growth in January was significant which led some to believe that February would show some sort of a correction. Well, not only did the January number hold, there was a small gain in February as well. The market reacted to this data with a massive sell-off of MBS.
All of this positive economic data is good for the overall economy and will help the housing market but rates will return to historical norms. You can expect to see the fed start raising rates sometime this year. My only hope is they don't do so too quickly and cause a panic.
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