SSFG: Greek Debt Crisis & Positive Housing Effect
Posted by Russ Schreier | Visited 782 times, 2 so far today | Leave A Comment »
Published by Alex Manessis and Russ Schreier, Samuel Scott Financial Group
Headlines recently have been dominated by the sovereign debt crisis of Greece and the financial woes of the European economy. Fear of defaults by nations such as Greece, Italy, and Spain has led to uncertainty about the future of the Euro currency as well as the world economic outlook over the next several years. But to the average American how does a financial crisis half a world away effect their personal finances and day to day lives? In one word, bonds.
Greece has so much bond debt to repay that without a bailout and deal to reduce the debt their nation would be bankrupt. However, economic slowdown over the past three years has triggered the same reaction from Italy as it did from Greece. Italy’s public debt to GDP ratio is now at 118.4% sixth highest in the world. This has increased the risk for investors in Greek and Italian bonds that these nations will not have the money to pay back their debt. With increased risk comes an increased bond yield to incentivize investors to keep pouring money into the economy. This has driven European bond yields sky high. Many investors, troubled by the lack of stability in the Euro Zone, have instead reverted to buying up safer bonds. Among the bonds viewed as “safe” are United States Treasury bonds, which have low yields due to their perceived low risk. This crisis has made T-bonds seem even safer than other alternatives and thus the yield has decreased on them as well. In the last year alone 10-year T-bond yield has dropped from 2.67% to 2.09%. This is good news for home buyers, as traditionally home loan interest rates follow the trends of the T-bond yield (at a slightly higher rate), which serves as a benchmark due to its government backing.
What does all this mean for those looking to refinance or purchase a home here in the United States? It says the uncertainty in the global economy means that low interest rates for home loans are here to stay at least into the near future. The European debt crisis, while solvable will take time to fix, as debt does not just disappear over night, even with massive bailout packages. However, this is positive for the housing market as the low Treasury bond yields plus the Federal Reserve’s plans to keep interest rates low will keep interest at or near record lows well into the near future. Now may be the best time ever to purchase a new home, prices are at their lowest levels since 2003 and interests rates are at their lowest ever. Lending institutions are eager for business during this recovery stage of the recession and are willing to give out loans to those who qualify. These low interest rates can save you tens of thousands of dollars during the life of a loan. If you are looking to refinance the decline in treasury bonds signals a decline in your monthly mortgage payment. Yes, there have been some rough times in the housing market, but now is the best time to buy and it’s a lot safer investment in your future than the alternatives.
