Government Shutdown and You

The Government Shutdown and You

The Government Shutdown and You

Have you heard? As of 12:01 a.m. on October 1st, 2013, the U.S. federal government has been shut down. All non-essential employees, activities, and functions have been furloughed, canceled, and suspended—a consequence of Congress failing to pass a spending bill for fiscal year 2014, which began on October 1st.  Each party attached stipulations to their respective spending bills that the other party deemed unacceptable. Neither party would yield; the prior year’s spending authorization expired; and the federal government shut down.

The severity of the shut down depends on its duration. Presently, the effects are muted, with the most obvious being the closing of America’s national parks and the conspicuous, almost ridiculous barricading of every monument in Washington, D.C. If prolonged, the effects will be more noticeable: delayed Social Security and military pay, for example.

However, the effects of the government shutdown have already been deeply felt throughout the mortgage industry. The mere talk of it has been affecting the industry for weeks. And, frankly, it’s to your benefit.

To understand why, first consider the correlative relationship between Treasury yields and mortgage interest rates. Generally, as yields on Treasuries fall, so do mortgage rates. Next, consider the factors that put downward pressure on Treasuries—namely, economic uncertainty, low economic growth, and scarce investment opportunities.

For the last five years, Western economies have suffered through all three. But within the last six months, the specter of a double-dip recession that was haunting our economy vanished. A semblance of certainty has returned. (Which, really, is a sad testament to the state of things. Growth may be anemic, but at least we’re certain it’ll be anemic!) Thus, from May 5th through September 5th, yields on Treasuries steadily rose, nearly doubling in that time. And, in tandem, mortgage rates increased as well.

Then, in mid-September, a combination of weak economic data and Ben Bernanke’s September 18th speech—declaring the Fed’s Quantitative Easing program would continue at least into 2016—conspired to drive Treasury yields lower. The economy, it turned out, was not recovering as robustly as assumed. Immediately, investors fled those investment vehicles that depend on healthy economic growth (such as stocks) and poured into Treasuries. As demand for Treasuries increases, the return necessary to attract investors, and thus the yield, decreases. And as go Treasury yields, so go interest rates.

At present, the government shut down is applying further downward pressure to Treasuries. Our meager economic growth of the last few years is being compromised by the absence of one of its primary contributors: government spending. This, coupled with the possibility of reaching our national debt limit, is causing more short- and mid-term economic uncertainty. Until these issues are resolved, Treasuries will continue their downward trend.

And so, for those in a position to take advantage of attractive lending rates, the economic uncertainty caused by congressional deadlock offers an unexpected opportunity. This is especially true for homeowners whose low home values prevented them from refinancing over the last couple years. Home prices throughout the Colorado Springs and Denver areas have continued to increase, and for many homeowners the equity is finally there to refinance their homes.

Whether you’re purchasing a new home or refinancing an existing property, you may see rates retreat back to the historically low levels seen earlier this year. For those who thought they missed their chance when rates started climbing over the summer, now is the time to start planning for another round of extremely low rates.

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