Is Europe’s Economy Affecting U.S. Mortgage Rates?

When the U.S. housing bubble burst in mid-2008, it set off a wave of events that arguably caused a worldwide financial crisis. Financial experts and news organizations had a field day criticizing the U.S. and taking great joy in the fact that she was being knocked down to size. While some of the criticism was rightly deserved, some of it was not. And with the financial troubles around the world still going strong, American analysts are beginning to wonder how much impact Europe’s problems are having on U.S. mortgage rates.

To answer this question one must first understand that persistently low mortgage rates are not good from the perspective of the investor and lender. They reduce the amount of return and take far too long to mature. When mortgage rates remain low for too long, investors pull their money out and put it into other things.

That said foreign investors reacted to the U.S. meltdown by pulling out of American securities and diverting that money elsewhere. Europe benefited due to the supposed strength of the Euro and the combined economic resources of the EU’s member nations. But as Greece and Spain have demonstrated, the European economy has been built on the same house of cards America was relying on. The national debt of Greece alone exceeds that nation’s total GDP. In other words, Greece owes more money than its economy produces.

With Greece in financial ruin, and Spain, Ireland, and Portugal teetering, investors who ran to Europe after the U.S. housing crash are once again returning to America. Yet this time they are putting their money into long-term Treasury Bonds. Depending on who you talk to, this sudden interest in T-Bonds is partly responsible for home mortgage rates staying at record low levels.
As T-Bond investment increases it drains money from the mortgage industry. Furthermore, where investing in bank securities can be open-ended to a certain degree, T-Bonds are typically 10-year notes. Money invested in T-Bonds is money out of circulation and when banks have less to loan, they tighten their belts. This reduces the number of loan applications which in turn, causes banks to keep the rates low in order to encourage borrowing. It’s a vicious cycle which seems to feed itself.

While the foundering U.S. may have been a catalyst to the global financial problems, the economies of the whole world have all contributed. One of the things needed to start us on the long road to recovery is a return to more realistic mortgage rates. It is the only way to attract investors.