To understand how the US Mortgage rates could be affected by the Greek default, first we need to understand how mortgage pricing works. Yes, banks take money from savers and lend it to borrowers – but the actual process and methodology has evolved far beyond this original and basic process.
Banks borrow money from each other, it increases their profits, and in turn they lend that money out as well. They do this on money markets, where they can buy money with variable rates, or with fixed rates, etc. If a mass default causes panic there is a potential of a repeated credit crunch similar to the financial crisis of 2008. Since market rates would spike, inevitably mortgage rates will rise as well.
US mortgage rates have dropped, and housing is becoming more affordable, and the Greek default is one of the reasons why.
- Greece in 2000 is doing great, investors are capitalizing on Greece’s strong outlook on the future
- Late 2000s recession comes → main industries of tourism and shipping are hit hard → debt grows quickly and by 2010 talks of emergency bailouts
- Greece accepts bailouts from IMF and European Central Bank → gov’t forced to cut salaries of public employees → protest ensues (death, people injured)
- Turns out austerity measures may have been good for Greece’s money problem but had a high human cost → Prime Minister Alexis Tsipras elected on her “anti-austerity platform”
- Tsipras says no to new austerity measures and attempts to re-negotiate debt → worked with IMF for a deal, but when does that ever end well?
- IMF expects ⅕ billion euro payment → Greece is not going to pay it
So why does all this affect mortgage rates in the US?
- World economy is super connected
- “flight to quality” begins during times of economic uncertainty (we know this from the credit freezing in 2008)
- Demand for safe assets is increased, MBS (mortgage-backed securities) are considered the safest asset classes, making mortgage rates (average is below 4%)
So – will rates ultimately sky-rocket? or lower? What do you think?
Someone tell the millennials to get a mortgage before it all changes again.