In our “2019 in review” series, we’ve looked at the performances of the stock market and real estate markets and analyzed what could be in store for 2020. Up next we examine interest rates and what ended up as being an unexpected and historical year.

I was grateful for the opportunity to interview Brian Ream, Home Loan Advisor at Stewardship Mortgage. As a mortgage broker, Brian loves diving into numbers and analyzing the best loan for his clients. 

Brian, going in to 2019, what was the expectation for interest rates?

Because of the experience in 2018, the inclination was that rates would continue to go higher, or at least stay in that same range. In December 2018, the Federal Reserve indicated they would continue raising rates throughout 2019.

In reality, they dropped! We had some of the biggest movement in rates that we’ve seen in years. The Federal Reserve even ended up lowering short-term rates. 

What causes interest rates to move? Does the Federal Reserve moving rates mean mortgage rates will move?

It can definitely influence mortgage rates, but it’s not as strong a force as people think. What actually drives mortgage rates is the buying and selling of mortgage backed securities. These are essentially bonds composed of a bunch of mortgages. The reactions of professional traders that trade mortgage-backed securities to what’s in the news is what moves mortgage rates. 

Typically, when the economy is looking good, people sell bonds and buy riskier assets like stocks, so that drives rates up. If there’s bad economic news, traders buy bonds, which drives rates down.

What lessons can we learn from 2019?

It’s almost impossible to time rates. You can read all types of professional and “expert” opinions, but their predictions are just guesses. If you’re buying a house, you should focus on what’s affordable, not predicting what rates will do.

Another lesson is waiting for the Federal Reserve to announce an expected rate cut before locking in your mortgage rate isn’t worth it. The news about an upcoming rate cut is known by everyone and already factored into the prices of mortgage-backed securities.

Since that’s the case, I won’t ask you to predict where rates will go for 2020. So tell me what the current rate environment is like. Are they still low?

Rates are still really good. They’re about as low as they’ve been for the past few months. The recent tensions with Iran sent rates down.

Since you’re in the mortgage world, what does this mean for home buyers or people with a mortgage?

I think there are two things to consider with how good rates are. First, I think it’s wise to explore the idea of refinancing to get a lower rate if you think your rate is high–especially if you got a mortgage in 2018. Even though that was recent, it was a year when rates were higher.

Another consideration is that home values are high. This means there could be an opportunity to not only get a lower rate, but to get rid of private mortgage insurance if you have it. Also having that equity could allow you pull out that value to pay off other debt or do a home remodel.

How can people get in touch with you about refinancing?

The best way is to go to our website and schedule a time to chat. Especially if you have a mortgage already and just need me to run some numbers to see if a refinance makes sense, there’s a place to schedule a quick phone appointment.

Although they don’t grab the news headlines like stocks, bonds and interest rates can be just as fascinating and can tell us more about our economy and inflation.

Brian mentioned that rates typically rise when the economy is good. If that’s the case, why did rates do the opposite in 2019, even though our economy has been strong? Looking at rates in different parts of the world can provide a good explanation.

Interest rates in other developed countries are even lower than ours. Both the 10-year German and Japanese government bonds moved negative in 2019! If you’re an investor overseas and need a place for safe money, you’re better off looking at the relatively high rates of United States government bonds.

Brian said when investors buy bonds, bond yields go lower. This is what happened in 2019. Even though our economy was expanding and unemployment rates were at record lows, we still had money pouring into bonds from overseas investors. This sent long-term rates down.

These events ultimately caused the yield curve to invert in the fall. Typically, longer-term rates are higher than shorter-term rates (plotted on a graph, this relationship is shown as an upward-sloping curve). With rates inverted, shorter-term rates were higher than long-term rates.

Why was this a big deal? Historically, an inverted yield curve is a leading indicator of a recession. If you were watching news headlines, you were thinking a recession was just around the corner. But the economy remains strong, and a recession doesn’t appear to be near. I think global low rates were the culprit of 2019’s inverted yield curve.

That does it for our “2019 In Review” series! I’m grateful for the opportunities to interview Jean and Brian as they reflect on the events of last year.