Austin: Life and Economy Disagree About What's Best

Money matters, and it’s what keeps the world going, but opening too quickly to save the economy can have disastrous consequences. Interest rates and prime rate tend to move in the same direction, but in March, they moved in separate directions showing an abnormal market structure, according to Market Watch.

Let’s unpack what’s happening.

Prime Rate is the rate at which money can be borrowed commercially.

Interest Rate is the amount the lender charges the borrower to borrow money.

It makes sense, in normal market conditions, these rates tend to trend upward or downward together. Sure, there are fees to doing business, and borrowing money comes with the risk associated with the amount of income you bring in versus your expenses and debts. Still, generally speaking, rates trend the same direction together.

In March the Federal Reserve lowered prime rate as the first wave of Coronavirus arrived in the states, in an effort to keep the economy moving. In the Austin housing market, my family was able to benefit from this decision. The lower prime rate also caused lower interest rates and my husband and I had not locked our interest rate on the home we were preparing to buy. We locked in the dip and are able to enjoy a much lower fixed interest rate than we thought we could achieve. As a result, we were able to shorten the term of our loan and not lock the 30-year rate we were anticipating. We didn’t change any of our other expenses, but were in ‘the right place at the right time’ and enjoy the benefits of those decisions.

The very next day the markets reacted to what people were doing because they were afraid.

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Fear Takes Over

Fear took over, and people began coveting things like hand sanitizer and toilet paper. The Austin housing markets reacted to the fear-based economy, and in an unnatural move, sent interest rates on the rise, even though The Federal Reserve had lowered prime rate.

What does this mean?

It means something unnatural is happening. In this case, fear and people’s decisions making as a result of fear, are causing the market to react in atypical ways. Over the next days and weeks, we watched interest rates climb and were grateful we secured our mortgage rate in the dip. Mortgage rates are currently in a three-year low, and that means people have a unique buying opportunity. If you're borrowing money on a fixed rate you may be able to make a bigger purchase than you had planned. If you’re borrowing on an ARM — an adjustable-rate mortgage — carefully forecast your future because your rate will adjust higher as the market rebounds and acts normally again. That increase means your monthly payment will also go up in accordance with the stipulations on your note. Just because the payment is sweet and low today doesn’t mean it will stay that way. And, the bank doesn’t just raise your payment. You agreed to this upfront and any rate changes are governed by the legal documents for the loan.

The markets react to people’s buying habits and right now people are reacting in atypical ways.

Creative Marketing

Have you noticed the creative marketing by car companies? The new car, if that’s your desire, will be delivered to your home, with 3–6 months of deferred payments. It’s genius marketing for car sales. Not so good if you sign up and have the car delivered and have lost your job or the market doesn’t recover within the next 3–6 months.

Reopening for business is a good thing; right?

Open Businesses, Rebounding Markets

Open businesses are getting the economy moving again, but if we are not careful to take proper precautions, we could move backward.

“The push to reopen the economy is making a W-shaped recovery very much more likely,” said Jeffrey Frankel, professor of capital formation and growth at the Harvard Kennedy School.

What does that mean? It means that we could experience a double-dip recession before rebounding eventually. And, that will be bad for morale and kill hope for recovery.

Emotions Affect the Market

People who are itching to get out of the house and throw off their masks, or rebelled against putting them on in the first place, are taking unnecessary risks. If you’re not adhering to state and local guidelines, you may be part of the problem, prolonging permanent recovery.

Like my neighbor who had a big party last weekend. Like a family who hosted a wedding and didn’t take any distancing precautions in an effort to be over the restrictions and celebrate a blissful ceremony. Would we like to congregate and hug? That’s a resounding yes, but it’s too early to recklessly abandon precautions. Most sensible people in Austin are staying sensible, but there are a few in every bunch.

We’ve got to stay the course.

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Reopen Businesses

As Austin reopens businesses, we need to do so with care. We can’t just toss the masks aside and run up and hug each other like we did before, in the PreCorona Era. We need to be sensible so that we can reopen and stay open.

We can expect an increase in new cases as we reopen. Still, if we open slowly and keep precautions in place, we can hopefully avoid the double-dip recession economists forecast.

Personally, I don’t want to go back into lockdown, like many mayors and governors are calling for people to do. People have gone too far in normalcy, and not far enough in simple precautions to save lives and help the economy recover faster. The second wave is already here and we’re emotionally drained, some financially drained. Money matters. Health does too. Stay the course for a solid recovery.

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