Impact of the Japan Earthquake on Mortgage Rates

Mortgage Interest Rates Available Today Are Unsustainable Over the Long Term For Two Reasons.

Editor’s note: The following was written by Nikul Patel, the president of Home Account.

At Home Account and Bills.com, we are asked by many of our borrowers about the impact of Japan’s devastating Tohoku earthquake and tsunami on US mortgage rates. Since the March 11, 2011 earthquake, mortgage rates have fallen by about 0.25% for 30-year fixed-rate mortgages. We believe this is a temporary shift and expect rates to rebound in a few months. To understand the relationship between a Japanese earthquake and US mortgage rates, we must look at the tectonic shifts the magnitude 8.9 earthquake created on world capital markets.

As the scope of the damage unfolded, US, Asian, and European capital markets became unsettled by fears of slowing economic growth in Japan and a stalling of the US economic recovery. (The Tohoku region, which includes Sendai, accounts for about 8 percent of the Japan’s gross domestic product, and economists believe the earthquake and tsunami will cause Japan’s economic growth to be .5% lower in 2011, but will rebound in 2012 due to reconstruction.)

In an effort to calm capital markets, on March 15 US government officials took the unusual step of announcing continuing support to the US economy. Such strong support by Federal Reserve reassured frightened investors, made US treasuries attractive, and pushed interest rates lower. Mortgage interest rates in US mortgage market dipped, which had been edging up from their historic lows in 2010.

We believe the interest rates available today are unsustainable for the long term for two reasons. First, Japan’s government must inject billions of dollars into its financial system to make sure Japan’s fragile economy can withstand the earthquake and tsunami’s deadly one-two punch. This will create demand for the Yen in the foreign exchange market, which will result in higher Yen prices.

Second, Japan has been the second largest holder of US debt for decades. This means Japan holds US treasury certificates, which are in effect, loans to the US government. To raise funds to repair the devastation and rebuild critical infrastructure — the most obvious example is electrical generating plants — Japan’s government must sell US treasury certificates. Japan’s sales will almost certainly flood the market with US debt. This will cause the T-note prices to fall, which will push the yield higher and as a result, mortgage rates will resume their upward climb.

We recommend Bills.com borrowers assess their financial needs and consider macroeconomic factors when considering a mortgage refinance. No one can predict the future with certainty. However, the Tohoku earthquake and tsunami created so much infrastructure damage that it seems unlikely the US T-note will be unaffected by Tohoku’s aftershocks to Japan’s economy.

Nikul Patel is the president of Home-Account Online, a company dedicated to helping consumers reduce the time and money it takes to secure the right mortgage. Home-Account makes finding a mortgage fast, smart, and simple. Home Account is owned by Bills.com.