Coronavirus and Your Money: Special Coverage

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By Ian Salisbury
February 5, 2020
Copyright (c) 2020 Shutterstock

More Americans are applying for new mortgages than at any time in almost seven years … and a big reason for the surge is the coronavirus that has gripped China and sparked fears of a worldwide pandemic.

That may seem far-fetched, but it highlights the amazing inter-connectedness of the global economy in 2020, when an economic disruption in one part of the world can quickly ripple across nations. As it happens, worries about China have prompted global investors to snap up safe-haven assets like US Treasury bonds. That, in turn, has made interest rates cheaper for all kinds of U.S. borrowers, pushing the average 30-year mortgage rate to 3.51%, its lowest level since September, according to Freddie Mac.

U.S. consumers, most likely unaware of the reason, have responded by shopping for new mortgages. On Wednesday, the Mortgage Bankers Association said mortgage applications jumped 5% on a seasonally-adjusted basis from the previous week, reaching their highest level since May 2013. Refinancing applications spiked 15% to their highest level since June 2013.

From China to the Mortgage Market

So what is going on? The answer has to do with how economic uncertainty in one part of the world can spread quickly, affecting investors and consumers everywhere.

As of Wednesday the Chinese government was still struggling to stop the coronavirus from rapidly spreading beyond central Chinese city of Wuhan, where it originated. Efforts have included a lockdown on travel in and around the city of 11 million, while other countries have been imposing their own travel restrictions. The outbreak has prompted memories of the 2003 SARS epidemic, which hurt Chinese economic growth. Back then, however, China represented only about 4% of the global economy. Today it’s 16%.

“The knock-on effects for the global economy are going to be much larger,” Peterson Institute China expert Nicholas R. Lardy, recently told The New York Times.

Coronavirus fears have sent China’s stock market plunging. While U.S. markets have not seen similar losses, they have grown more volatile with the Dow dropping 600 points on Friday, before regaining that ground this week. The global uncertainty has prompted investors to snap up U.S. Treasury bonds, historically a far safer type of investment than stocks.

When investors rush to buy bonds, bond prices naturally rise. That pushes bond yields — essentially the interest rate attached to them downwards — making it cheaper to borrow. Since the start of 2020 the yield on the 10-year Treasury note — the one that banks generally look to in setting mortgage rates — has slipped to 1.54% from 1.88%.

The upshot is that the average interest rate on a 30-year fixed mortgage has also fallen, to about 3.51% from 3.72% in the past month. Of course, the difference — about a quarter percentage point — might not sound like much. But for long-term borrowers in can make a big difference. On a $250,000 loan, shaving a quarter point from the interest rate on a 30-year mortgage could save you about $3,000 during the first five years and more than $12,000 over the life of the loan, according to the CFPB’s interest rate calculator.

No wonder homeowners are taking advantage.

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