Go Blue! The College Football National Championship finally comes back to Michigan.
And what a run it was! Undefeated season knocked off the perennial superpowers, Alabama in the playoff and won the championship game convincingly, 34-13.
I’m not the biggest college football fan on the planet, but being a lifelong Windsorite, I’ve always had an appreciation and admiration for the history behind UofM Football.
I think a lot of sports enthusiasts in Windsor feel the same.
As for Coach Jim Harbaugh however (pictured above on the right), I’ve never really been fond of him. Just something about his smug personality that I could never get past.
But that said you got to give credit where credit is due.
Not long after taking over the team in 2015, people were calling for his resignation. He did not meet early expectations, as fans were looking for immediate success.
Harbaugh stayed focused, ignored the noise, recognized that the program needed to take a step back before it could take two steps forward, and eventually went on to accomplish his goal of leading UofM to a Championship.
There’s also lots of noise in the real estate market these days.
And it makes it difficult for anybody in real estate to play the “long game.”
Much of the noise is around interest rates.
One day we were told they will stay low for a long time, shortly thereafter they start to increase at record pace, and now we are holding our breath waiting for rates to fall…
And in my opinion… this will be a cycle that continues… wash, rinse, repeat.
In an environment like this, it really makes it difficult to make any long-term decisions.
My approach is to try and understand all of the fundamentals at play (interest rates are just one of several factors that impact real estate), make a long-term game plan based on all of those factors, and then try remaining nimble and agile in order to deal with all of the shorter term challenges and decisions that you will be faced with.
These days, interest rates are one of those shorter-term challenges I am referring to.
Gone are the days when you can just seek out the best 5 year rate, set it and forget it.
Depending on your personal situation, and your future outlook on interest rates, a very good case can be made for almost any length of term, or even an open variable rate mortgage.
Currently, a shorter-term mortgage rate is higher than a longer-term mortgage rate (i.e. the 2 year rate is more expensive than the 5 year rate).
This is called an inverted yield curve and is not typical. Usually the longer term is more expensive than the shorter term (i.e. the 2 year rate is cheaper than the 5 year rate).
Why is it currently inverted?
The oversimplified explanation… the market is betting that interest rates will soon go down, and the common play is to only commit to a short-term interest rate now, because you can lock into a longer term later, at a lower rate.
And who is the “the market” that is making this bet?
Again, the oversimplified explanation – these are the people that buy and sell government bonds, which ultimately establishes government bond yields.
What’s a government bond yield?
The government issues bonds and offers a rate of return to whoever buys those bonds. The yield is the rate of return (i.e. the interest rate you get in return for buying that bond).
It’s important to understand bond yields, and where they are trending, because this is one of the key factors that Canadian banks use to set their long-term mortgage rates.
This is the factor that I focus on most heavily when faced with having to make an interest rate decision, today.
There are certainly other factors that influence mortgage rates:
- Bank of Canada’s Policy Interest Rates
- Economic Conditions
- Cost of funds (i.e. what interest rate they are paying for the funds that they are lending out)
- Competitive Landscape – what rates are other lenders offering
- Credit Risk – Individual borrowers’ creditworthiness plays a crucial role in determining mortgage rates. Banks assess the risk associated with lending to a particular borrower, and those with stronger credit profiles may be offered lower rates.
- Profit Margin – Lenders are in the business of making a profit, and they factor in a margin above their cost of funds to cover operating expenses and generate income.
In the end, it’s a shame that we are in an economic environment where things are so volatile, whereby you need to study and understand silly things like government bond yields, however, such is the real estate game these days.
And we at UCC are here to help you should you need us.
So if you want to have an exhilarating conversation about the inverted yield curve… just give us a call! ?
Until next time,
Vince
