Why Europe Matters to Your Mortgage (Now)

Why Europe Matters to Your Mortgage (Now)

When most of us think of Europe, we think of the Tower of London Bridge, the Leaning Tower of Pisa, bullfighting at La Plaza De Los Toros in Barcelona, or dining at the Eiffel Tower in Paris. For many of us, the slightest mention of these places take us on a time warp of days gone by. Nonetheless, the place to be right now in Europe is Frankfurt. You might say “Frankfurt? Nothing is in Frankfurt.” I would agree, as there is nothing awe-striking in this city. However, the European Central Bank (ECB) is headquartered in Frankfurt and some big decisions are taking place now, which are having a huge effect on our mortgage market.

Most would agree that our world is now interconnected, and what we do here in America effects the world. Conversely, what the world does effects us. Accordingly, the ECB, or Europe’s “Fed” recently made the decision to purchase $58 billion dollars in bonds per month. This is Europe’s nascent attempt at quantitative easing (QE). Our American Fed recently wrapped up its third round of QE in October of last year and many considered it to be a smashing success. If the intent was to drive down rates, it did just that. Mortgage rates hit a 55-year low of 2.875 percent, a rate unseen since the presidency of Harry Truman. Now, the ECB is engaged in its own efforts to kick start its economy as demand for Gucci bags, Hermes shoes, Siemens trains, Rolls Royce cars, French cosmetics, and British TV shows have gone off the cliff.

Now, the ECB’s move has resulted in an erratic real estate market in the U.S.  Our stock market has fallen, but then rebounded.  Prices of U.S. Treasuries increased sharply, and then fell like a brick. Mortgage rates initially skyrocketed, and then topped out; now, rates have been falling ever since. What’s going on?

For starters, Europe’s economy is weak. Outside of Germany, every country in the Union is experiencing a bit of the economic flu. Europe was slow to kick start its economy when things got rough and the US got tough. The US Fed went through three different rounds of QE to get the economy growing. Now, Europe is just starting its first QE. Many view Europe as weak on immigration, soft on unity, and lax on regulation. Accordingly, investors are running away from the mighty Euro, and into the arms of the American greenback and other dollar denominated instruments such as mortgage bonds that sent rates down and fast.

As we can all see, the decline in oil prices has lowered rates at a steady pace. The European flu has hastened the fall. The more that we believe that Europe is not recovering fast enough, the more that we, the American citizenry and the world’s citizens will run from the Euro, European stocks, and will even be fearful of German bonds. People will tepidly avoid French bonds, Spanish, Portuguese, and Italian bonds. They will have absolutely no interest in Grecian bonds whatsoever, as Greece still has no forecast of stability anytime soon. Instead, the world that once looked to Europe for financial stability will return to investments originating on American soil.

The world is putting its full faith and credit in our investments, particularly bonds backed by the mortgages built on American shoulders. As such, interest rates are falling because investors are looking for safety and not necessarily a return on their investment. What is far more important is the return of the investment! Now, faith is in the homeowner making their monthly payment to protect the American dream. Faith is in the factory owner striving to pump out product and keep the lights on. Faith is in the apartment complex just outside of the Central Business District. As the worldwide demand for debt backed by American real estate debt rises, the interest rate that banks can offer falls. At this time, the world doesn’t seem interested in French debt, Italian debt, Japanese debt, Chinese debt, or Argentinian debt. Instead, it finds itself running for the greenback, and Americans will watch rates fall and enjoy every minute.

It’s sad to say this for now, but what’s bad for Europe is great for the American borrower. The lack of demand for anything financial in Europe is a boon to us. The ECB has to buy bonds to kick start its economy because other investors won’t move. Increased demand drops interest rates, and others around the world will be motivated to buy U.S. treasuries, corporate, and mortgage bonds by the billions. We the people will be laughing with our interest savings all the way to the bank (literally)!

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 howardpr@rosecityrealtyinc.flywheelsites.com.