In just six weeks, 2016 has become quite the roller coaster ride. Our markets are digesting the Fed’s rate hike in December. Worsening economic conditions in China and oil’s continual fall have made the rate hike look less than prescient, as the timing could not have been worse. It seems like the Fed waited too long and hasn’t shown enough concern about global forces that are seeping into our economy. Stocks have tumbled to lows that we haven’t seen in over two years as manufacturing, energy and bank stocks have taken a big hit. In fact, real estate has been the best performing sector in our economy. Home prices are forecast to rise by 5% this year.
With market volatility ongoing, investors have raced to safe haven investments in the treasury market. 10-year bond yields started the year at 2.20% and have dropped by ½ percent to trade in the 1.75% range. The huge drop in bond yields has helped to bring mortgage rates down just about the same ½ %, and if the economy continues to show signs of slowing rates will drop even further.
The jumbo 30-year fixed can be locked in at 3.50%, close to historic lows. Adjustable rates have also plummeted, with a 5-year arm at 2.375% and the 7- year at 2.625% – all with zero points. These low interest rates could be good news for the economy as lower rates mean lower payments and more cash in our pockets.
Real estate is also a big beneficiary as lower rates increase buying power. Consumer spending accounts for two-thirds of the economy, and every dollar saved is a dollar that can be spent to help revive the economy. Cheap gas helps as well.
Where the economy will go the rest of the year is unclear. Housing and employment are strong, but manufacturing and the banking sector are failing. We are also at the mercy of China and the rest of the world. Falling oil prices may help our wallets with gas but not our economy. The ride is far from over.