The Power of Fear
I’ve written a few articles about the power of economic indicators and interest rates, and how both affect financing properties and leverage. The jobs report, consumer confidence, the pending sales index, and housing starts are just a few examples of these indicators. For the longest time, they were bellwethers for the industry. However, I would like to submit a new power broker to the list as the most significant mover of the interest rate market, and it’s called fear.
Economic fear has been pervasive throughout this entire recession. Americans don’t feel secure about their jobs, earnings, their housing situation, or the country’s future. Accordingly, this fear has manifested into rates that haven’t been this low since polio was eradicated in the United States. This fear is legitimate–it gets to the psyche because it’s real. People are feeling it in their pocketbooks. Homes are lost in foreclosure. Coupons are clipped and used in the grocery store. These actions create anxiety that causes people to pull back on purchases, walk away from homes, and work longer hours without complaining. However, the fear that I’m referring to has nothing to do with economics.
During the week of October 13th 2014, it was all about Ebola. Sure, the news was awash with reports about a second recession in the Eurozone, and the market reacted in the appropriate way. Rates dropped by one-eighth of a percent. However, when the announcement was made that a second nurse contracted Ebola from the Dallas area, the media went wild and rates cratered. Understandably, news reporters discussed other “bad news” in the world. Bomb strikes in Syria failed to have the intended effect of getting ISIS out of Kobani, but it was the Frontier flight from Cleveland that captured people’s attention. Subsequently, as the details of the flight and passengers were released, fear started to set in and interest rates plummeted.
Americans have grown to become numb to negative economic news. We had more beheadings, GDP figures out of Germany and Italy weren’t hitting the mark. More new homes are sitting vacant in more markets for more days. Retail sales are much lower than expectations for the year (and this time we can’t blame it on the snowy weather). In many cases, these market movers were announced around the same time back-to-back. Amazingly, we barely got a nudge in rates. The average rate on a fixed 30-year was 4.25%, and maybe with two or three pieces of bad news we could find ourselves temporarily at 4.125%…..or even 4.00%. Unfortunately, it is usually short-lived, as some consumer confidence figure or unemployment report is positive for the month and rates jump back up to 4.25%. However, not this time–we have a new fear to contend with.
The fear created by the Ebola scare is different. The government can’t manipulate or make it better with spin control. The best and brightest public health doctors have been unable to contain it. It kills in a vicious way and it can be sitting right next to you on your way home. The news reports paint a grim picture of the virus. The images of individuals lying flat on their backs in protective bubble transport canisters are eye-popping. The grim images of field workers carrying bodies away to be burned are awe striking. Fear is setting in that the virus may come to a town near you. As gruesome and fatal as Ebola is, this level of fear is great for rates. The market has been pushing to get below 4.125% for the longest time. Now, the flirtation is over. Rates have returned to the high 3s. A new surge in applications arose this week and this can be attributed to good ole fashioned fear. Borrowers are letting their rates float, because the pandemic could get worse and their rate could get better. As bizarre and morbid this may sound, poor conditions and literal death in the streets is yielding lower rates for borrowers.
Therefore, some people in the industry, both borrowers and players alike will temporarily profit from a strong surge in business due to the fear of Ebola. Whether the disease flies or walks in, the fact that it can be concealed until the truth is obvious will keep folks guessing and scared. Where there is fear, there is uncertainty. Where there is uncertainty, there is a flock to safety, which usually means treasuries. And when treasury rates go down, mortgage rates commensurately respond in-kind thereafter.
Typically, the bad news that drives interest rates lower is temporary. Confidence goes down, but eventually comes back up. Sales go down, but bounce back as well. Ebola is a new thing. Some people are losing their lives, while others are losing their minds out of pure fear. I know that bad news is good for business, but this type of fear carries permanent consequences. Personally, I don’t think that our mortgage market should ever celebrate a rally based on mortality; however, there are others who may say that I am completely wrong!
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.