|Interest rates may not remain under control says Derrick Strauss, as 10-year Treasury yields aggressively slide upward in the coming years. Derrick Strauss is the marketing manager for All Western Mortgage, one of the largest privately held mortgage banks in Nevada.Oceans2003: Why do you believe the Federal Reserve may lose hold of interest rates?Derrick Strauss: A phenomenon known as the great rotation. This means that bonds are losing popularity and equities are taking over.
Oceans2003: This will make interest rates rise?
Derrick Strauss: Yes, because the Federal Reserve will actually lose control of interest rates. A higher yield to investors means a steeper interest rate for consumers.
Oceans2003: Why hasn’t this happened yet?
Derrick Strauss: Up until now, this rotation has leaned more into cash over bonds, which has offered the consumer more security and given investors a lower return.
Oceans2003: What sort of increases are we talking and how quickly?
Derrick Strauss: I think we’re looking at a rise of up to 4 percent on a 10-year happening very, very quickly.
Oceans2003: And after that?
Derrick Strauss: Yields could hit 6 percent before the end of 2015. We haven’t seen numbers like that in nearly a decade.
Oceans2003: And what is the cause of this new shift?
Derrick Strauss: Investor fear, plain and simple. As the average American investor starts to see a loss, they will sell their bonds and convert to stocks, which will in turn create higher interest rates for homebuyers.
Oceans2003: We understand that the Fed will start to scale back their bond buying program in 2013?
Derrick Strauss: There is speculation that the monthly program will halt later this year. This fear caused a rapid rise in bond yields over the last few months.
Oceans2003: How does all of the talk about bond yields relate to the overall economy?
Derrick Strauss: Most people are familiar with the Dow Jones Industrial Average. Because of this rotation, on May 28, 2013, the Dow jumped to a record close of 15,409—up from just over 12,500 exactly one year prior.
Oceans2003: That’s quite an increase.
Derrick Strauss: It is, yes. And the S&P 500 has seen increases of almost 17 percent year to date.
Oceans2003: But why is it changing now?
Derrick Strauss: Because investors are beginning to see that it’s all risk and no reward. With the economy back on track, people are starting to do more to aggressively secure their financial future.
Oceans2003: Does this affect the mortgage market?
Derrick Strauss: Absolutely, as the economy strengthens mortgage prices typically rise. In fact, we saw home prices jump in percentage more in May of this year than in the last seven prior.
Oceans2003: What advice would you give to investors looking to get decent prices for 2013?
Derrick Strauss: I would say that the U.S. and Europe have already seen their big gains, but that the Asian market may still offer opportunity to buy low.
Oceans2003: Do you consider bonds a sound investment?
Derrick Strauss: Five years ago, yes. Today, no.
Oceans2003: With home prices and interest rates on an upward swing, are there still decent mortgage products on the market?
Derrick Strauss: Absolutely. We have seen an increase in responsible lending products and more favorable loans including the Hybrid ARM—an adjustable rate mortgage with a three- to 10-year fixed rate in the beginning.
Derrick Strauss is a real estate expert who serves mortgage clients in nearly two dozen states. He is the founder of Colorado Home Funding and the current marketing manager for All Western Mortgage. Derrick Strauss holds a degree in political science from the University of Rhode Island.