We did a first time Home Buyer talk last week, and we concluded the discussion talking about mortgage interest rates -and specifically what folks should be monitoring if they are trying to figure out which way mortgage rates are headed in the next few months. Our educated guess is that mortgage rates could be drifting higher.
We base this assumption on the fact that the US Economy is doing better, every month. However, we warned, some “outlier” like Greece, or fights over a more “naturalized Iran, could take things into a completely different direction. I went on to explain that the direction of Mortgage Rates is more like a hospital (we are in a sadistic sort of business). If you think about a hospital, when everyone is sick – business is good!
In the mortgage business, we are looking for BAD NEWS to equal lower mortgage rates. We monitor the progress of that “bad news” from Economic reports – like the Jobs numbers that come out the First Friday of every month, and the Productivity and Utilization reports.
Almost everyone wants to be more productive. I include myself in that group – there are lots of ways I could be more productive. When I have conversations with people I think are very productive, they almost always tell me they wish they were more productive.
In most cases, they aren’t responding to external demands. No one is cracking a whip over them; they have personal reasons for wanting to produce more. They want their children and grandchildren to produce more, too. It’s almost a cliché in American culture: when the kids become “productive citizens,” a parent can finally feel that he or she succeeded. Multiply this by millions of families, and the result is economic growth.
How Productivity & Growth Affect Mortgage Rates
Productivity is a critical part of the economic growth equation. We track the productivity of entire nations by means of gross domestic product (GDP), the sum total of all the goods and services their people produce.
There are two – and only two – ways you can grow your economy. You can either increase your population or increase your productivity. That’s it.
The Greek letter delta is the symbol for change. So if you want to change your GDP, you write that as
Δ GDP = Δ Population + Δ Productivity
That is, the change (delta) in GDP is equal to the change in population plus the change in productivity.
If you are a country facing a population decline (like Japan), then to keep GDP growing you have to increase productivity even more. Population growth (or the lack thereof) is very important.
You cannot grow your debt faster than your nominal GDP forever. At some point, the market begins to think that you will not be able to pay your debt back. Think Greece.
This is no different from the fact that a family cannot grow its debt faster than its ability to bring in income to pay that debt back. At some point, you run out of the ability to borrow more money, as lenders “just say no.”
As a family’s or a country’s debts grow, the carrying cost or interest expense rises, consuming an ever-larger portion of the budget until a breaking point is eventually reached. While the exact point is a matter for serious debate, there is a level at which debt actually limits the potential growth of an economy.
We are going to hear a lot about growth in the coming presidential election. A lot of people are going to offer formulas, but you can check how realistic they are because GDP growth has just three variables. If you want to increase growth, you have to increase:
- the number of workers, and/or
- the number of hours they work, and/or
- the amount they can produce in an hour.
According to a recent article in the Wall Street Journal, Governor Jeb Bush recently said Families “haven’t gotten a raise in 15 years.” Former Secretary Hillary Clinton mentioned wages eight times in a speech last week. So the rhetoric on wages is starting!
What’s not clear, according to the Journal, is weather any of these candidates realize the most important reasons wages have performed so poorly is a direct result of the output each worker produces.
“That neglect needs to end. Though it resonates less with politicians and the public than a higher minimum wage or tax cuts, raising productivity in the long run is the most effective way to elevate standards of living. It enables more goods and services to be produced with the same number of workers.”
Again – this is a mortgage site – we are interested in the direction of Mortgage rates this summer … but the state of the US Economy, and the debate around weather the Fed should, and WILL raise interest rates, is going to come down to the answer to this question of Productivity.
Why? Because the time lag required for a return to “full employment” will probably continue to be very painful for individuals.
The ONLY plus side I can see to the lack of full time work is that more people are qualifying for deferred Student Loans. I’m hopeful that not having to make fully amortized payments will make it easier for First Time Home Buyers to be able to buy!
Janet Yellen and the Federal Reserve say they will be raising interest rates this fall – and this will likely be as a result of optimistic signs they see in the GDP Growth here in the US. Those rising rates, will have a trickle effect, causing Mortgage Rates to go higher. How fast they move, will to a large degree depend on how the 3rd quarter GDP numbers appear to be headed here in the US – despite what happens in Europe.
Part Time Workers and Mortgage Rates
As you look at how many Americans are productively back working, it’s hard to ignore the fact that more and more people are working 2 and 3 jobs. Many others are simply working part time jobs too! The newest term for this change in the way we are producing is called the “GIG” Economy.
The millions who want to work full-time aren’t just sitting at home. Many who can’t find full-time positions are joining the so-called “gig economy” of part-time and contract labor. Uber drivers are just the tip of the iceberg. It seems as though any business that can replace one full-time worker with two or three part-timers is doing it.
This has a positive side – some workers get hours that are more flexible so they can care for children or juggle two jobs – but part-time work can also turn into misery.
The reason for this outcome is that businesses try to optimize the number of hours worked instead of making the hours more productive. The approach makes sense only if you presume human beings are all equally productive, interchangeable parts. We all know that’s not true.
However, it is true that many workers’ income is limited by the number of hours they can work. If you are a personal trainer, for instance, you can only do so many one-hour sessions in a day. Furthermore, competition limits the amount you can charge for each session.
The same is true for many creative occupations: programmers, artists, musicians, athletes, entrepreneurs, etc. Their actual income depends on the quality of their work and the demand for it, not the quantity or the number of hours on the job.
It would be great if every worker could have such a job, but that’s not possible. We will always have “personal service” jobs where productivity has natural limits.
Mortgage Underwriters DO TREAT chronic Part Time Jobs as being a Self Employed status! This is especially true if you are working as a Personal Trainer, and making “commissions” from each person you work with.
We have moved to a “Service Economy” and as such, we seem to be stuck with this subpar growth- and as it will continue to have a drag on GDP and the pull out of the Recession. the rate at which the Fed can raise interest rates may not be as fast as some of the folks on CNBC would have you believe.
That’s why even though more people are working, full time or otherwise, we are not seeing much in wage growth. We believe this is going to, again be a long term issue, just like the ones they are facing in England and other European countries.
For a decade, economic output per hour worked – the federal government’s formula for productivity – has barely budged. Over the past two quarters, in fact, it has fallen. Sluggish productivity is raising alarms all the way to Federal Reserve Chairwoman Janet Yellen – and could cause those at the Fed to otherwise delay raising mortgage rates later this year.
Productivity matters, economists point out, because at a 2% annual growth rate, it takes 35 years to double the standard of living; at 1%, it takes 70. Low productivity growth slows the economy and holds down wages.
If we are truly worried about where the jobs will come from in the future, then we need to make sure that those who want to create and fund new businesses can do so as easily as possible. The World Bank has created a ranking of countries by how easy it is to start a business in them. The United States is ranked 46th. I might quibble here or there with some of their stats, but not even being in the top 10 is miserable.
If you want to know why we are having a problem with a slow recovery, you might start with that simple statistic.
And by the way, those new businesses show up in GDP, productivity, and tax revenues. Up until very recently, net new jobs were almost always a result of new businesses. If you want to know why wages are stagnant, productivity is down, and unemployment is frustrating, you need look no further.
If you are looking for today’s best mortgage rate on a New Home in North Carolina – Call Steve and Eleanor Thorne 919-649-5058 we love working with First Time Home Buyers and we offer the advice you’ll need!