Tag Archives: Torsten Sløk

Chances of Negative Mortgage Interest Rates

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graphic by blamevaraia

TheStreet.com quoted me in Odds of Negative Interest Rates in the U.S. Are Slim. It reads, in part,

The odds of the U.S. lowering interest rates to negative levels remain low, because other forms of monetary policy such as quantitative easing could be adopted first.

The odds of utilizing quantitative easing are “quite high” or policies such as the use of repurchase agreements and the term deposit facility, said Michael Kramer, a portfolio manager on Covestor, the online investing marketplace and founder of Mott Capital Management, a registered investment advisor in Garden City, NY.

Choosing a negative interest rate policy (NIRP) in the U.S. would also affect the stock markets immensely and hinder bank profits.

“Due to the size of treasury and money markets, it could have some very severe ramifications,” he said. “In my view, our treasury markets are the safest and most liquid in the world.”

Investors would seek a higher return on capital elsewhere such as higher paying bonds which carry more risk, Kramer said.

“This could become problematic for the US government which is dependent on issuing debt to fund the government operation,” he said.

Negative rates in the U.S. would result in too much risk and backlash and would only occur if all other attempts by the Fed failed.

“At this point, the Fed has a few other tools it can use before it has to use the tool of last resort,” Kramer said.

The use of negative rates remains divisive despite the growing adoption of them in the central banks of the Eurozone along with Denmark, Japan, Sweden and Switzerland. In countries such as Japan and Germany, investors are forced to pay a fee instead of earning interest.

Lowering current interest rates to negative ones “would not be a panacea,” said former Federal Reserve Chairman Ben Bernanke, now a distinguished fellow in residence at a meeting hosted by the Hutchins Center on Fiscal and Monetary Policy at Brookings last week. He also said the effect on consumers would be nominal.

During periods of low inflation, negative interest rates are now a more likely option to policymakers, but they have not proved to be a solution to boosting lackluster economies. The use of negative rates has not proven that they are an effective monetary tool, said Torsten Slok, chief international economist for Deutsche Bank, at the meeting.

Negative rates have produced anxiousness among investors who are seeking greater yield.

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The probability of U.S. banks paying consumers interest on their mortgages even though Danish banks are paying borrowers interest on them remains scant, said David Reiss, a law professor at the Brooklyn Law School. The interest rates of adjustable rate mortgages (ARM) are typically set for the first five or seven year and resets to a new rate. The new interest rate is the combination of an index and a spread with the index often being the London Inter Bank Offered Rate (LIBOR), which has flirted with 0%.

The majority of ARMs have a clause which limits the amount the interest rate can be changed annually, including ones offered by Fannie Mae.

Millennials and Homeownership

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photo by flickr@tonywebster.com

TheStreet.com quoted me in Millennials Are Accruing Less Debt, Bypassing Homeownership. It reads, in part,

Millennials are accruing less debt than their counterparts did back in 2003 — despite being saddled with large amounts of student loans — because they are putting off buying homes.

The research conducted by Torsten Sløk, a Deutsche Bank international economist, shows that Millennials, ages 25 to 35, attained less debt in 2015 than their counterparts did in 2003. The data demonstrates a 29-year old in 2003 had an average debt amount of $41,761 compared to $36,810 in 2015 or a 33-year old owed $56,859 in 2003 and $52,640 in 2015.

“It is an urban myth that the young generation today is more indebted, it is the older generations that have higher debt levels,” said Sløk in a research note. “The reason is that since 2009, it has been difficult for Millennials to get a loan. As a result, 25 to 35 year olds today have less debt than in 2003.”

Debt has been “harder to obtain” for Gen Y-ers whether they are credit cards or mortgages, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

“Millennials have not been inundated with easy to obtain credit cards like in past years,” he said. “Creditors are not on college campuses offering credit cards to college students any longer.”

While Millennials are saddled with record levels of student loans because of the skyrocketing costs of college tuition and the ease of obtaining these loans, Millennials “continue to have less credit card and mortgage debt than their parents and grandparents,” Triggs said.

The level of student loan debt is hindering borrowers ages 18 to 35 from paying for necessities such as rent, utilities and even food as 43% expressed this sentiment, according to the National Foundation for Credit Counseling’s 2016 consumer financial literacy survey, said Bruce McClary, a spokesman for the Washington, D.C.-based national non-profit organization.

“There is a staggering amount of student loan debt and it is a burden for many,” he said.

Homeownership Delays

Although Millennials have expressed the desire the own a home in the future, they are keen to keep renting in part because many of them switch jobs frequently, have not amassed a down payment or do not want the financial commitment. The zeal to pursue the “American dream” of owning a home has waned.

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The assumption that home values would rise faster than other investments has been challenged since the Great Recession, said David Reiss, a law professor at Brooklyn Law School.

“One big issue is the role that home ownership plays in wealth creation,” he said. “The bottom line is that homeownership can help build a nest egg for retirement, but long-term trends and individual decisions about homeownership will have a big impact as well.”