Macroeconomics analysis and application
The looming COVID-19 pandemic has hit all sectors of the global economy. To most working American population, April 1 was a payday merged with serious financial decisions. The current state of affairs has forced many businesses to close down, and massive loss of jobs seen. Business operators are struggling to pay their debts during these hard times, but if mortgage payment stops then, we are likely to see a shutdown in the financial system. The impact of the mortgage sector not contributing to the general revenue as captured in an article in the Economist dated April 4th 2020 and thus, economic failure sets up our discussion topic.
The Economist (2020, par. 2) has it that over a third of America’s 120 million households own their homes and at the end of 2019, this population owed around $11 trillion in mortgages. The $11 trillion mostly depended on the house owners’ monthly deposits and interests rates, a figure that is under contest since when using national averages as a guide, we see that around $ 52 billion might have been due on April 1. A total of 43 million households rents estimating around 163 million individuals viable for revenue from mortgages.
Looking at the 163 million individuals failing to pay mortgages this April, we can see a decline in revenue collection culminating to an intense blow on the American economy. With a total of 28% of the salary paying for a mortgage in America, a medium earner expects to pay around $ 1,301 every month in mortgage (Forbes, 2020 par.1). The $ 1,301 multiplied by the total house owners and rent payers amounts to trillions in a year forming a large part of the economic drivers. Since the onset of the COVID-19 virus, rent payment has been waivered meaning that loss in trillions in the economy. The GDP is expected to fall by a quarter during this pandemic time. Around 23% decline in the economy will emanate from the low traffic of people within streets.Initially, 5% of the total population spent their time and money dinning out. This is a big blow to hotels and resturants within the states. An analysis shows that if the current situation continues for four more months then collapse in the hospitality industry is a sure thing.
Taking a scenario that all house owners were to pay for a mortgage during these difficult economic times, then we would have witnessed a financial crisis in other commercial sectors other than mortgages. An example of such a hard-hit industry would be the retail industries, including restaurants which have remained closed during the coronavirus pandemic. Monthly retail rent stands at $ 20 billion, according to Marcus and Millichap consulting firm. There is a high risk that retailers won’t pay a single cent during this period. The Cheesecake Factory says it won’t pay anything while sorts wear company Nike claims that it would serve half of its rent (The Economist, 2020). The two companies, Nike and Cheesecake, depicts the shift in the mortgage curve in previous years and 2020. Estimates have it that the total monthly collection may be sliced to a quarter if conditions prevail. However, some industries may not be affected as most of their employees can work from home. The online shopping industry like Alibaba and eBay might not be intensely affected and may have to fully pay their rents as they only need space for storage and packaging.
Return rates
Infected
The graph above indicates that with increase in number of the affected persons, there is a decrease in the return rates particulary in paying of morgages. The prices are geared to fall and reinvesting is an option one needs to take. Sales in general are to be immensely affected. Lending out of money is advised against as borrowers are not likely to repay on time given that they are protected with the Feds laws.
The flexibility of creditors and landlords is said to be the determinant in the damage on the financial system. The government should hold talks with concerned parties to postpone payments of rents. Government-sponsored entities own a majority of residential mortgages; thus a grant forbearance and moratorium on foreclosures have been imposed on homeowners. To balance the financial situation, the Federal Reserve will buy large quantities of mortgage-backed securities issued by government-based entities. Such measures should apply to small residential landlords as they own the majority percentage in rental properties and owe approximately $ 4.3 trillion in mortgage amounting to slightly over a quarter of the total mortgage revenue collected.
Middlemen like the mortgage service providers are being affected in ways they cannot comprehend. The said middlemen who give out short and long term loans to house owners are complaining of running out of cash. Their strategy to capitalize on rising interest rates by short-selling mortgage-backed securities (MBS) with the intent of hedging risks they take when locking new clients have hit rock bottom with the emergence of Fed witch is buying the MBS in high rates. The action by the Fed has led to losses on the middlemen hedges as they buy every MBS before the loans can be issued. A collaboration between the Fed and the government will enable many homeowners to delay loan repayments.
Lam (2020) analyzing the coronavirus impact on mortgage stipulates that Fed cut rates to keep the U.S economy moving despite slow global growth and the current coronavirus pandemic. Interest rates are critical determinants in the cost of borrowing. Subsiding interest rates have led to a fall in mortgage rates. In the week of March 12, the average rate on the 30 years fixed mortgage rate elevated to 3.36%. The 15 years fixed-rate mortgage fell to 2.77%. Mortgages rates fell to its lowest in March and are now below 1%. The tariffs could drop even more if the current situation continues. The mortgage rates do not always move in lockstep with government benchmark. The low mortgage rates are unprecedented. The low mortgage rates make it a good time for one to refinance at a lower price, saving house owners about $ 150 a month.
Saving during Fed cuts is not a smart idea because banks lower the annual percentage yield offered on their products. The rates at which banks decrease their yearly percentage yield depends on the prevailing conditions and competition. To be safer during Fed cuts, one should consider locking down certificates of deposit.
Rate of borrowing
Repaying rate
cured
In the case that more people get cured from the virus, the rate of borrowing will increase and return rate will be almost equal to borrowing rate. The GDP will again shoot up and the economy will stabilize again.
Economic growth has generally stalled due to Corona Virus pandemic. In the U.S.A, a U shaped financial curve aims to illustrate the shock the virus has left in the economic state of the country. The space between the old and new paths depicts one-off damage on the economy supply and loss of output. The shape of the curve clearly shows that during the Coronavirus era, banks are likely to be in crisis damaging the labour supply and productivity. People staying at home satisfies the curve’s conditions. Labour supply for manufacturing and retail enterprises subside, and as a result, productivity has lowered. Banks have to be lenient to borrowers by the Fed cuts and mortgages rates have decreased, indicating financial shutdown.
In conclusion, the Corona Virus pandemic has brought with it financial sabotage and economic difficulties to wage seekers within states America included. Workers have strived to make ends meet through paying essential bills. Such include mortgage bills which the government has advocated to be waivered amid the chances that none payments may lead to the collapse of the economy. Through Fed cuts and mortgage refinancing, the economy should stabilize shortly.
References
How Much Of My Monthly Income Should I Spend On A Mortgage? (2017, March 1)
Forbes.par.1. Retrieved from: http://www.forbes.com/trulia/2017/03/01/how-much
income- should i-spend-on-a-mortgage. Amp
Lam, B. (2020). What the Feds Near-Zero Rates Mean for You. The Wall Street
Journal. Retrieved from: http://amp/articles/what-the-feds-near-zero-rates-mean-for-you
11584321264
What missed rent and mortgage payment mean for the financial system. (2020, April 4). The
Economist.par.2. Retrieved from: http://amp.economist.com/finance-and
economics/2020//04/03/what-missed-rent-and-mortgage-payments-mean-for-the-financial
system