By Moshe Wilshinsky
Moville Mortgage and Finance Ltd.
The news of the day is “markets are volatile”, meaning they have gone up significantly over the past few years, (in China’s case within a year), lost significant value in a few days, then gained much of it back and lost it again. To explain what has caused this goes beyond the scope of this article, but among the most obvious reasons is a combination of the People’s Bank of China (PBOC), China’s Central Bank, devaluing the Yuan (the unit of their currency the Renminbi), and economic data that shows China’s economy is slowing down. These factors and others have seemed to ignite fear in the markets, while there are those, in both the US and Europe, who feel an interest rate increase by the Federal Reserve is needed.
In our own economy, the Madad (an acronym representing something similar to the Consumer Price index or CPI found in the US) has been constantly increasing on a month to month basis since the second quarter of this year. This has caused interest rates on mortgages in Israel to increase. This created a situation we have not seen in many years, where interest rates seem to be increasing for the long-term market. For the first time in quite a while, mortgage borrowers bear the risk of interest rates rising throughout the process, from getting approved and signing loan documents, until the loan actually funds. Keep in mind everything is subjective. A Mortgage interest rate today of 4.1% for a 30 year loan is within the norm (40% down, good credit income, etc) whereas 4.7% would be considered high; however, just a few years ago 4.7% would have been considered low. Years from now, reading this article, we have no idea if our future selves will be looking up or down, meaning will these interest rates seem very low, or will they be at or above the current mortgage interest rates at that time? The bottom line is no one knows. If a “bear market” (a term used to describe a market where everyone wants to sell more than buy shares and, given the principles of price and demand, prices drop) persists internationally, and the fear of the effect internationally of a prolonged weakening of the economy in China continues, (since today China is a major consumer it can affect many other countries’ economies), this may dampen the Federal Reserve’s rate increase. This is because a weak economy and bear market sustain low interest rates. In Israel we survived the aftermath of the 2008 Bear Market in part due to the stewardship of the Governor of the Bank of Israel, Dr. Stanley Fischer; interesting to note that currently Dr. Fischer, who at present sits on the Federal Reserve board, is among those who feel a rate increase now is appropriate.
This economic environment has an effect on interest rates as well as on what is called the mortgage underwriting process. These are the rules and requirements that determine if a borrower can qualify for a loan, as well as determining the loan amount, interest rate, and other conditions. In the same way as investors become more conservative, everyone starts being more concerned with not losing money than maximizing how much they make; so to with the lending industry, and especially the mortgage industry, becomes more conservative, i.e. it is more difficult to get a loan. How what is going on in China, and the decisions of the Federal Reserve board, will affect us here in Israel, we will have to wait and see.
While the future is unknown, here in Israel we have a government that is putting more attention on housing finance than almost any Israeli government I have seen in the last 25 years and, underwriter and analyst in me aside, I am hopeful and excited that our little housing finance market here in Israel can finally evolve; so from this optimist’s perspective there are more things looking up than just the interest rates.
On that note I would like to wish all our readers a healthy and happy 5776 filled with simcha, bracha and hatzlacha.