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Mortgage rates are influenced by a myriad of economic and geopolitical factors, some of which may initially seem unrelated to the housing market. The recent Israel-Gaza conflict provides a prime example of how global events can have ripple effects on domestic mortgage rates. Here’s a deep dive into how the outbreak of this conflict inadvertently benefited potential home buyers in the US.
Seeking Safe Havens in Turbulent Times
At the core of this connection is the concept of “safe haven” assets. When geopolitical tensions rise, as they did with the Israeli-Hamas conflict, global investors often pivot towards assets they perceive as being more stable or less risky. This is especially true when the conflict or event creates significant uncertainty in global markets.
US Treasuries and mortgage-backed securities (MBS) are considered such safe havens. The reason is simple: these assets are backed by the full faith and credit of the US government, making them highly reliable in terms of expected returns. As the Israel-Gaza conflict intensified, investors, wary of the unpredictability in global markets, shifted their investments towards these securities.
Increased Demand Leads to Lower Mortgage Rates
When demand for MBS increases, their prices rise. As the prices of MBS rise, the yields or interest rates they offer to investors decrease. Here’s the trick: mortgage rates tend to move in the same direction as these yields. So, when yields on MBS go down, so do mortgage rates.
For the average American home buyer, this means that the interest rates they’re offered when seeking a mortgage can be significantly lower during such periods of increased global tension. The recent quarter-percent drop in mortgage rates, as cited in the article, can be attributed in large part to this shift in investor behavior.
Geopolitical Uncertainty and the Fed’s Decisions
Another factor that intertwines the Israel-Gaza conflict with mortgage rates is the Federal Reserve’s potential response. The Fed, tasked with overseeing US monetary policy, is always vigilant about domestic and global events that might impact the US economy.
Given the current geopolitical uncertainty, there’s a strong case to be made for the Fed to adopt a “wait and see” approach when considering interest rate hikes. Raising interest rates can have a cooling effect on the economy, and in uncertain times, this could exacerbate economic challenges. By potentially delaying a rate hike, the Fed indirectly ensures that mortgage rates remain more attractive for home buyers.
The Amplifying Effect of the Bond Market Holiday
It’s worth noting that timing played a role in the magnitude of the recent rate movement. With the bond market being on holiday, most mortgage lenders didn’t adjust their rate offerings. This meant that when they did update, they had to account for multiple days’ worth of global events, amplifying the change in rates.
Under normal circumstances, a single day’s events might not have as pronounced an effect. However, when combined with a bond market holiday and significant geopolitical events, the impact on mortgage rates becomes much more noticeable.
Conclusion
While it may seem counterintuitive, global events like the Israeli-Hamas conflict can have tangible effects on the domestic housing market. As investors seek refuge in safer assets like US Treasuries and mortgage-backed securities during turbulent times, the resulting dynamics often lead to lower mortgage rates. For potential home buyers, staying informed about these geopolitical events can provide unique opportunities to lock in more favorable rates. Whether we realize it or not, the world’s interconnectedness means that events thousands of miles away can influence the price we pay for our dream homes.
