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Tariffs, possible recession spell end to rising mortgage rates

 

By Jeff Lazerson

6/28/18

 

What I think: Between February 2006 and May 2007, the United States experienced something called an inverted yield curve, where the 2-year Treasury rate had a higher yield than the 10-year Treasury rate.

It’s important to understand that banks pay short-term depositors (2-year Treasury rates, for example) interest to loan those customer deposits out at a higher rate (10-year Treasury rate, for example).

The difference or spread between your short-term deposits and the long-term loans that bankers provide is one way for banks to profit.

If you have to pay a higher rate for the short-term deposits than you can get lending out the funds long-term, you are losing money. So, banks tend to dramatically decrease or stop lending when the short-money becomes more expensive than the long-money.

In addition, it’s a return of capital that banks have to worry about (if those businesses suffer to the point of not being able to survive), not just a return on capital (interest rate spread).

Many businesses depend on banks to lend them funds to run their businesses. If you can’t get funding for expansion or just to run the daily business, well, look-out!

The Great Recession started December 2009 (22 months after the yield curve first inverted), according to the National Bureau of Economic Research.

Today, the 10-year is at 2.83 percent and the 2-year is at 2.52 percent — a 31 basis point spread. The gap has not been this narrow since August 2007.

The Federal Reserve has telegraphed two more short-term interest rate increases this year which will probably be one-quarter point each in September and December. So, if nothing else changes we’d have a 2-year Treasury at 3.02 percent and a 10-year Treasury at 2.83 percent — a.k.a. an inverted yield curve.

Isn’t it ironic that we’ve had the second-longest economic expansion in U.S. history — after perhaps the second worst economic cycle in U.S. history (Depression was the worst).

Cycles happen.

Citing that 9 out of the last 10 recessions were preceded by an inverted yield curve, Michael Pento, president and founder of Pento Portfolio Strategies, said: “A recession is less than one year away.”

Senior Mortgage Banking executive Griff Straw sees our next recession after the 2020 presidential election.

Pento thinks President Trumps tariff’s and our evolving multi-national trade war will be similar to the 1930 Smoot-Hawley Tariff Act. It will exacerbate and protract this coming recession as tariffs tend to slow global trade.

“Trade was 58 percent of global GDP in 2015,” said Pento, citing World Bank data. “My research shows global trade shrank from 12 percent in 1929 to 4 percent of global GDP, or by about 65 percent.”

Holy, Moly!

Given all these headwinds, my crystal ball says that fixed mortgage rates are topping out right now.

And, thank goodness for all of the property appreciation we’ve enjoyed. The next recession will see property values flatten and soften some, but they won’t fall down.

 

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.

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