Ask any person whose credit scores have gotten chopped and they would most likely warn you about the consequences of exorbitant borrowing and the difficulties of accessing credit. With this cautionary tale in mind, what are we to make of the credit downgrade of the U.S. government – the first time in the country’s history – announced by Standard & Poor’s over the weekend? Some panic and plenty of anxiety were thrown about by the media in discussions over the weekend before the opening of the bond market. Well, Monday morning is here and the market is open. The U.S. government borrowing rate has fallen to approximately record lows. Simply put, never in the history of the U.S. has the cost of borrowing been this cheap.
My thoughts are that the rates may be impacted by 30 basis points at maximum. Mortgage rates will most likely move in the same direction as the government borrowing rate, because there is government backing of mortgages on nearly all mortgage originations in today’s market.
It is also possible for the rating downgrade to have absolutely zero impact if global bondholders do not care for S&P’s opinion. After all, information about this country’s future deficit is freely accessible and not proprietary to S&P. Furthermore, S&P as well as other rating agencies like Moody’s and Fitch are still cleaning the egg off of their faces after having awarded the best triple-A ratings to subprime mortgage bundles during the housing bubble years, driven by perverse incentives to get paid by mortgage bundlers (just think how Roger Ebert and other Hollywood movie critics would rate a film if they were to get paid by the movie’s producers, for example).
Even if rates were to rise because of the downgrade, this fact is less important in light of the current overly-stringent underwriting standards and the general lack of consumer confidence about the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.
Mortgage rates declined in the Las Vegas market during the past ten days while the media constantly reported on the pending downgrade. Meanwhile, cash closings account for at least fifty percent (50%) of transactions and Treasury Note sales appear strong paying lower yields. Consumer confidence remains the most important concern.
[...] Lawrence Yun, chief economist, National Association of Realtors: “Even if [mortgage] rates were to rise because of the downgrade, this fact is less important in light of the current overly stringent underwriting standards and the general lack of consumer confidence about the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.” [...]
[...] How will the Credit Downgrade Effect Local Real Estate http://economistsoutlook.blogs.realtor.org/2011/08/08/u-s-credit-downgrade/ [...]
[...] Lawrence Yun, chief economist, National Association of Realtors: “Even if [mortgage] rates were to rise because of the downgrade, this fact is less important in light of the current overly stringent underwriting standards and the general lack of consumer confidence about the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.” [...]
[...] Lawrence Yun, chief economist, National Association of Realtors: “Even if [mortgage] rates were to rise because of the downgrade, this fact is less important in light of the current overly stringent underwriting standards and the general lack of consumer confidence about the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.” [...]
[...] NAR Chief Economist, Lawrence Yun, explains in this short video the relationship between the US credit rating and its relationship with interest rates. Yun says: [...]
[...] August 8, 2011 by Lawrence Yun, Chief Economist & Senior Vice President, Research · 6 Comments Filed under: Credit [...]
Doesn’t anyone think Mr. Yun’s analysis is strange? S&P, Moody’s, Fitch and the Chinese all warned our government days before the debt deal was made on 8/2/11. It was reported by AP in many internet and TV broadcasts. They said,”If there are not 4 trillion dollars in deficit reduction included in your debt deal, then we will have no choice but to re-evaluate your credit rating”. Our government ignored these warnings, passed a bill that actually only has 38 billion in cuts for this fiscal year and now we have been downgraded! It is that simple AND it is not good. Why should anyone be surprised by this, especially those in our profession. We see it all the time with buyers and lenders. If your buyer has too much debt the lender requires they pay off certain debts to acquire a loan approval. It is amazing that Lawrence Yun dismisses this fact of lending when it comes to our government. Resting on the fact that 90+% of all mortgages today are government backed ( insured ) is insanity. The government can not pay it’s bills unless it borrows money from foreign countries. Their assurance is worthless. It is all FIAT and borrowed money. It can not last much longer. How, if they need money so badly and don’t stimulate the economy with real jobs and real money to receive larger revenues, then how can you possibly think this will work out just fine. You are in denial. As real estate professionals we all know how the system works. We all know what happens when you can not pay your mortgage. We are backed by the government of hard socialist China. We are backed by the nuclear reaction camp of Japan. We are backed by the unrest of riots in the country of England/UK. That gives you confidence Mr. Yun??? I wish I were you, because that gives me stomach aches. There most likely will be more down grades ahead of us within months to come and the interest rates will go up quite a bit more then you are speculating. They will have to. When your credit score goes down, your interest rate goes up. That is how the lending system works. Expect it.
The cost of money and the credit ratings in the global market do not work as it does for the consumer. The consumer is entirely at the mercy of the rules the financial institutions set, no way around it. The wholesale markets work differently. I do remember when I first entered investment banking being shocked that a lower rated company like Campbell’s had was offered better terms in the Euromarket than higher rated, but not very well known companies. The US had the deepest financial markets in the world. There are things you can do with US securities that you just cannot do on thinner markets.
Comparisons between the US fiscal situation and that of households may make pithy political slogans but just have very little to do with each other. Let’s face it, consumers do not have the right to print money and have it readily accepted as a reserve currency. Come to think of it, neither does Greece, Ireland, Portugal, Spain and even Italy. No, we do not want to abuse the right, but the US situation is very different. We will solve our fiscal challenges by using appropriate fiscal policy not by pretending that we are handling credit cards (the lame comparison from ignorant or deceitful politicians).