The mortgage rate in the US is not insulated from the rest of the world, as the global economy is integrated financially and politically into our own. For example, China has had a huge shift from an agrarian society to an urban/middle-class society in the last 40-60 years. They are generating 60-65% of their GDP through domestic consumption, and with this growth are adjusting to being a consumer-based culture, relying more on outside resources. This growth has led to the biggest real estate boom in history over the past 10-15 years. But Chinese developers are facing large debts, having to issue corporate bonds of up to 20% (what we call junk bonds) to fund their real estate projects until they are profitable. The expectation that the government will assist them, which is improbable, is leading to uncertainty in that market. That will influence the cost of goods in the US, putting bigger demands on where we spend our dollars.

The US economy leads the world in domestic consumption. We manufacture a high percentage (75-80%) of what we use, and we also export a lot of raw materials, food, and fuel to the rest of the world. Demand for US goods, though not a large part of our economy, can affect how you pay for your mortgage. The products being bought and sold here and abroad do create jobs, but the job market has changed recently, with an enormous quit rate and the early retirement of baby boomers. The shortage of workers increases consumer prices and sends less money to the federal government, necessitating the printing of more money to pay for everything. All of these elements – inflation on capital, employment, goods bought and sold around the world, coupled with the issues in China and other countries – affect our mortgage rates. The goals of the forthcoming government tapering and higher interest rates are to avoid higher prices, curb inflation, and try and grow the economy at the same time. Jeff’s guests this week include:

– Connie Hernandez of PMA – Covina suggests locking in your loan, now that interest rates are going up.

– Robert Perez from Evernest Real Estate Advisors talks about investment properties.

– Noah Shuffman of Caliber Home Loans discusses technology in the lending industry.