QE IV, Perhaps?
The Dow Jones has just crept past 17,000. The S&P is flirting with 2,000. All told, champagne bottles with corks should be popping, and the nation, no, the world’s economies should be celebrating. Although you may not be a “sophisticated investor” or a hedge fund manager, if you were smart enough to place your money in some form of equity based mutual fund, you earned no less than a 10% return on your money (if you had an index fund). However, we can’t jump the gun and celebration too quickly. The bond market is telling a different story.
As stock records are being made on a daily basis, government bonds from the US, Germany, and the UK are being purchased in droves, sending their prices up while their yields are inversely falling. Commensurately, this is occurring in the mortgage market as well. Recent auctions of Fannie Mae, Ginnie Mac, and Freddie Mac mortgage backed securities (MBS) have been oversubscribed. MBS on the secondary market are trading hands at lightning speeds, sending prices of securities up and rates down. Consumers and property owners are reaping the rewards by locking in the best rates of 2014, but at what cost?
The underlying thought process is that although the stock market is on a tear, the economy is still very weak worldwide. This is beyond the extended winter that walloped the first quarter earnings reports and froze people (literally) in their tracks. Money managers at the big banks, insurance companies, hedge funds, and even Black Rock (the $3 trillion money management behemoth) are worried that post-recessionary growth is not going to take off. This is a “yin and yang” conundrum at the highest extent. People love the idea that their portfolios are taking off in a positive direction and that they can a mortgage loan at a low interest rate on their home or commercial investment property. However, the extended lag in economic growth and output is a drag on the majority of the nation.
Rates are still historically low, but with an increase in home prices and the lack of full time employment, the majority of Americans still can’t afford to buy into the American dream of a white picket fence. Apartment buildings of all sorts and sizes can be financed at up to 85% CLTV, but wage suppression keeps many individuals from participating in a strategic purchase as their debt-to-income ratios are too high for current lender guidelines. Consumers continue to hear about higher payroll figures with a commiserate fall in unemployment, but the number of underemployed workers with challenged credit histories, and low liquidity is rising faster than wages. Essentially, reduced wages and credit-ability do not create an environment that is conducive to a healthy real estate marketplace or broad based economy.
In the end, some indicators will always tell you what is really going on. Like tealeaves in a cup, market indicators offer a glance into the mind of an investor. Treasury notes pay a paltry 2.5%, so why would anyone on earth buy them during a bull run, except out of fear? Will we get more growth powered by American ingenuity? Will we have a greater number of educated individuals working at more than entry-level grocery store wages? Will growth be sustainable without Fed assistance and will our economy be able to power itself out of economic darkness without monetary stimulus artificially propping it up? Could there be a fourth round of Quantitative Easing needed (QE IV perhaps)? I don’t know; however, like EF Hutton, when the $3 trillion BlackRock fund speaks, I listen.
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 firstname.lastname@example.org.