By David Coster , Total Mortgage Services, www.totalmortgage.com May 23, 2011
Mortgage rates are headed down today! When mortgage-backed securities (MBS) are popular with investors then rates fall. Today MBS are popular because stock investments are not. Let’s look at the reasons why.
Driving the popularity of MBS today is the need for investors to find “safe” investments in which to place their money given fears of stock investments falling in value. Why are stocks falling in value? Three words offer an explanation: Italy, Spain and China.
We live in a truly global economy where as the saying goes, “When one economy catches a cold, all economies feel sick.” The fact is that global economic growth is interdependent on the buying and selling activities of people and businesses all over the world. When one nation’s economy weakens it tends to slow growth in other regions as well—the weakness is contagious. Today Italy, Spain and China are not feeling particularly well and all world markets are reacting negatively.
Italy’s debt rating was lowered by a major ratings agency indicating the ratings agency believes there is a greater risk that Italy will not be able to repay its debts. Spain was placed on a “negative” ratings watch list, indicating that conditions in the country have worsened and may be headed for a ratings downgrade. How have conditions worsened? Interestingly, over the weekend the incumbent socialist political party was soundly defeated in local elections. The surprising thing is that it was the socialist party fighting to dramatically cut government spending. With the socialists’ losses, the ratings agency is concerned that the will to follow through with spending cuts may be gone.
The third principal driver of mortgage rates today (as it is many days) is China. Reports released today indicated the economy in China has slowed markedly. While the perception of this report is initially negative, it could be good news in the longer term. The fact is that the rate of growth in China was unsustainable. Efforts by China’s economic officials to slow growth and reduce inflation appear to have worked. Ultimately, this is good news both for China and the global economy.
Mortgage rates could be in for a wonderful period as the summer months are typically weak for stocks and stronger for investments such as MBS. It looks like a great summer to buy a home or refinance a loan!
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