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How the coronavirus sunk mortgage rates

I was talking to a client last week who works at the CDC and was doing data analysis on the coronavirus that has swept China. She had heard mortgage rates were really low and was asking about a refinance. I blew her mind when I told her the low rates were in large part due to the virus. 

She assumed I was joking. I most certainly was not. 

In short, here is what happened: Investors freaked out and pulled their money from the stock market. Then, they put it into safer investments like 10-year Treasuries, which caused the yield to drop and mortgage interest rates along with it. 

Mortgage interest rates are loosely pegged to the yield on the U.S. Treasury’s 10-year note. Why? Because most people move in 7-10-year cycles. 

Check this out:

On Jan. 17, a second death was reported in Wuhan Other cities from across the globe reported new cases of the virus, and health authorities in the U.S. announced that three airports would start screening passengers arriving from that city. This was the day people started to realize this could be something serious. 

On Friday, Jan. 17, the Dow Jones Industrial Average had risen for seven straight days and was at 29,348. By the end of the following Monday, it had dropped to 29,196. By Jan. 27 it had tanked to 28,536, according to the Wall Street Journal. On Jan.17, the 10-year yield was at 1.823 percent. It stayed flat the following Monday, then reacted strongly to the stock market’s plummet, and yields fell to 1.509 percent by Jan. 31. 

As for mortgage rates, according to MortgageNewsDaily’s daily survey, the average rate for a conventional 30-year mortgage was at 3.7 percent on Jan. 17. By Jan. 31, it had plummeted to 3.47 percent. 

It was a pretty wild time for us lenders. On Monday, Jan. 27, we saw rates continue downward. On Tuesday, an independent international auditing agency released a statement saying they were impressed with China’s response to the virus, and rates actually ticked up a bit. Then on Wednesday, news reports came out saying that China’s reports on the virus and number of people infected were misleading, and rates continued back downward. 

My CDC friend asked me, “Why are investors so worried about this virus? What does it have to do with the stock market?” 

I think to some degree, it’s because it’s a new virus and details about it are unknown. China has literally locked people in their houses, which keeps them from going to work. This is a country that accounts for 20 percent of the world’s manufacturing output. If they all of a sudden stop manufacturing, there is going to be worldwide economic ramifications. 

The stock market is our country’s largest legalized gambling entity. Investors are betting on companies that they think will win profits in the near and distant future. It’s like if a week before the Super Bowl, news broke that both teams were infected with the flu. Would you bet on a team not knowing who on each team was infected? Probably not. You’d probably wait to hear which key players were infected. 

It’s kind of the same thing with the stock market, except investors always want their money working. So instead of just pulling it from the stock market and holding it in their banks, they put it into things with a guaranteed rate of return. The rate of return on those instruments is much lower than what they could earn in a winning stock market, so they keep their clients’ monies there only until they get a better understanding of which companies and markets will grow in the coming economy. 

It’s been a wild ride that has saved a lot of homeowners a whole lot of money. If you have an interest rate of over 4 percent on your mortgage, you should quickly have someone run the numbers on a refinance. A cure for this flu, which I do recognize as a good thing, would likely shove rates back up quickly.


Geoff Smith is a mortgage banker with Assurance Financial focusing on residential home loans for refinances and home purchases. *The views and opinions expressed in this column do not necessarily reflect the views of Assurance Financial Group.