Have you ever wondered how iron mining in Australia affects your mortgage here in America? No, this isn’t a Proposition 64-induced line of far-out questioning, but rather a question on how well you understand the impact that government policies have on your finances. The actions of governments around the world have a direct and profound impact on the global economy and on your finances as a result. Especially in America, where our mortgage industry is inextricably linked to our government’s standing in the world, it’s crucial to understand how the government and the promises it makes affect your finances. That’s the theme of this week’s show.
Within the last week, we’ve seen the following: US interest rates briefly and severely tanked after several months of being soft; China devalued its currency and lowered capital reserve requirements in its banking sector; and Australia reported more poor figures for its export sector, which for years has depended heavily on Chinese demand. Decades of Chinese over-investment have created supply gluts in virtually every industry, dampening its demand for Australian raw materials and driving down the prices of commodities worldwide. Meanwhile, China has been purchasing US debt to keep interest rates and the US dollar, and thus the Yuan, low in order to boost its own export sector. The price of US Treasuries directly affects the interest rate on your mortgage. So that’s how the policies of foreign governments affect your mortgage.
Domestic policy, though, has an even more immediate effect. The US government, through the GSEs Fannie Mae and Freddie Mac, purchase mortgage debt and securitize it, creating a direct link between US bond yields and interest rates. Interest rates, meanwhile, determine how much of a house a person at a given income level can afford. Beyond interest rates, the relative tightness of industry laws and regulations determines who will qualify for a mortgage and at what cost. As we have seen over the last couple years, overly strict lending regulations have kept many individuals out of the market.
Local laws and regulations can also have a drastic and lasting impact on housing, as we heard from Bill McAfee of Empire Title this week. He had us consider the Colorado Springs market, where we have had yet another month of extremely low inventory and very brisk sales. We are, in fact, at a 15-year low in terms of housing inventory. This is because Colorado Springs—unlike places such as Las Vegas and California—did not allow inventory to build to absurd levels. New housing is still coming online, but as it is we’re largely stuck with the inventory we’ve had for years. Las Vegas, meanwhile, has a lot of excess inventory to go through, and therefore their inventory levels are presently very robust.
These are just some of the ways that government policies and promises affect your mortgage. Given the general outcry we see any time someone proposes axing Fannie Mae or abolishing the home mortgage interest deduction, it’s likely government policy will be affecting us for decades to come. As a consumers and homeowners, the best we can do is understand these policies, appreciate how and when they’ll affect us, and strategize to make them work in to our advantage.