Is a recession coming next year?
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Persistent global headwinds and developing domestic issues are going to land the U.S. in a 2017 recession. Get your mortgage house in order. You will weather through the turbulence just fine.
First, a quick explanation: A strong dollar and some very slow economies are driving down U.S. exports. Competing oil producing nations continue to drive down oil prices hoping for a similar result to the game of musical chairs. Finally, deflation is triggering negative interest rates in an attempt to stimulate particular economies.
On the domestic side, U.S. banks and Wall Street are experiencing shrinking revenue. Earlier this week the Wall Street Journal reported that Goldman Sachs had its worst revenue quarter in 12 years.
United Health Group, the largest U.S. health insurer, is bailing out of Obama care because of massive losses. So, if your monthly health insurance bill doesn’t look like a second house payment now, it’s going to real soon.
Kiss your disposable income goodbye.
“The economy is most likely going to continue to grow,” said Michael Fratantoni, Mortgage Bankers Association chief economist. That said, the mortgage bankers forecast a 25 to 30 percent chance of recession next year.
Mortgage money is really cheap today with fixed rates as low as 3 percent with some buy-down points. Do not be afraid of adjustable loans as we go down this interest rate slope. We are already pretty close to zero. Right now you can buy a 1-year adjustable at 1.75 percent, a 5-year adjustable at 2 percent and a 7-year adjustable at 2.125 percent.
We may have a whole new meaning to the term negative adjustable rate mortgages. In the olden days, it meant your loan balance could go up because you had the option of a minimal payment that did not even cover the accruing interest charges. In this new form you would actually get paid for borrowing mortgage money. Nice!
“Negative interest rates are used by European Central Bank, Bank of Japan, Sweden, Switzerland and Belgium,” said Anthony Chan, Chase Bank’s chief economist. But he thinks financial markets aren’t reacting well to negative rates.
If Chan is putting a wet blanket on the idea of negative U.S. rates, a Federal Reserve Bank press person doubled down on that, providing two paragraphs to make it clear that Chairwoman Janet Yellen is not actively considering this.
It’s obvious that bankers won’t want this because it’s costly, not profit generating.
But the real elephant in the room is much worse if world momentum goes the way of negative rates. It will most certainly create a Y2K type problem for all mortgage lenders. The Fed would not respond when asked if banks are software equipped or what plans the Fed has to get the U.S. prepared for this.
We are lucky in the OC with a diversity of industries and a tight employment market. Double down on your cash reserves by putting 12 months of mortgage payments aside.
Home prices will flatten a bit next year, but you won’t see a precipitous drop in home values. Weather the storm. This too shall pass.
Jeff Lazerson - Mortgage Columnist since 2011