Why Is China So Important to Our Interest Rates?

The past few weeks has seen some major volatility within the stock markets. Some weeks have seen major pullbacks and others we have seen significant bounce-backs. The first ten days of April, the volatility of the markets hit on the downside. One thing which is interesting about this pullback is that it happened as the economy was pulling out of its pause caused by a very cold and harsh winter. For example, the first week in April we saw a stronger employment report and the second week first time claims for unemployment fell to levels not seen for many years.

When stocks drop the analysts are always searching for explanations, yet sometimes there seems to be no logic. One card which keeps coming up in explanations this month is the threat of slower growth in China. So we must ask, why is China so important to us other than it is a huge economy? Certainly at a growth rate of over 7.0%, this is not an economy in trouble. For one thing, the Chinese populace travels overseas to the United States in great numbers -- almost two million per year. In 2012, the Chinese spent almost $9 billion in the United States.

Secondly, China helps keep our interest rates low in two ways. Their low cost of manufacturing lowers cost to our consumers. And the profits these manufacturers produce are eventually invested in US Treasuries. Basically, China is helping to finance our Federal budget deficit. More economic growth and lower rates? These are good enough reasons for us to hope that the growth in China continues. And good enough reasons to fret when it appears that the Chinese growth cycle is abating. So, if you are shopping for a home this week and enjoying the fact that rates on home loans are very low -- don't forget to thank the Chinese, as improbable as that may seem.

 

Mike Ervin

Branch Manager/Mortgage Loan Officer

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

 

It is Finally Happening

For years the slow recovery was hampered by the existence of tighter credit. A vicious cycle was created when the recession caused consumer credit to worsen and at the same time banks tightened up on lending standards. For some time we have been predicting that lending standards in the real estate sector would not loosen up until two factors emerged. Factor one was the stability or recovery of real estate values. It makes sense that lenders would be shy about lending in a real estate sector in which the underlying asset was unstable.

Yet, the real estate markets recovered over the past few years without a significant improvement in lending standards. Why? Some blamed it on new legislation aimed at making lenders more responsible with regard to their lending. But most aspects of the legislation were not implemented until recently. In reality, there was a second aspect we cited over the past few years which has now come to fruition. For the past three years lenders were inundated with refinances because of record low rates. Now with rates still really low but a bit higher than they were, the refinance craze has abated.

It makes sense that lenders would not lower standards while they were overwhelmed with demand. Today, lending standards are loosening because lenders are hungrier. Many national sources for real estate loans have lowered their minimum credit score requirements. And we think that this will flow into other areas of lending such as cars and business loans. This is all part of building a virtuous cycle. Keep in mind that we are not looking for a return to the subprime era or anything close to that. The new legislation we cited makes sure lenders will be more careful. Underwriters are still scouring loans with a fine-tooth comb. But it is interesting that while lenders are implementing the new legislative standards, their requirements are getting somewhat less restrictive.

Mike Ervin

Branch Manager

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500