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Bad News Has Hidden Benefits for Mortgage Rates

There has been plenty of bad news for the economy over the past week:

Though these developments are certainly bad news in the near term, it is important to recognize how each contributes to the self-correcting nature of the economic cycle, which allows recoveries to occur. Already, consumers can see some positive side effects of economic weakness at the gas pump and in mortgage rates, and each of the above stories will ultimately contribute to the next recovery phase of the cycle.

Housing starts

Figures on housing starts date back to 1959, and October of 2008 represented the slowest rate of new housing starts on record. The slowdown has been drastic, as the October, 2008 figure represents a 37.96% decline from the corresponding figure for 2007. This is also considered significant for the broader economy, as housing starts are a key indicator of economic strength.

37.96% is a drastic decline, but should this come as any surprise? The woes of the housing market are well-known. More to the point, the collapse in housing prices is attributed to a boom of over-building earlier in this decade. Therefore, a decline in building should not only be expected, but should be seen as a necessary step to correct the supply-and-demand imbalance so that home prices can stabilize.

Consumer spending

As with housing starts, a sharp decline in consumer spending should come as no surprise under the current circumstances, though it is sobering to see the reports come out. Still, consumer debt levels have gotten out of hand, and while a cutback in spending won’t be pleasant, it is a necessary step to get household finances in order. A fundamental recovery cannot happen without this.

A more immediate benefit of falling consumer demand is the sharp drop in gasoline prices. Last week, U.S. consumers paid $1.32 less per gallon than the average price over the preceding year. For someone using 20 gallons of gas per week, this translates to an annual savings of over $1,300 per year. In other words, a by-product of falling demand has been a price savings that is equivalent to a pretty good stimulus check — without costing the government anything. 

Jobless claims

Jobless claims are the most problematical of the above factors, and not just because they represent the highest level of real distress for families. Unemployment can be expected to rise in a recession, but if it rises too steeply it can slow down the process of consumers shoring up their balance sheets.

Again though, economic weakness can have a natural, corrective effect. Along with a softening economy, we’ve seen a record decline in inflation. This, in turn, allows mortgage rates to fall, as they’ve done now for the third straight week.

With all these examples, the current news is genuinely bad, but in each case the seeds of an eventual recovery can be seen. As consumers repair their balance sheets, low inflation puts money back in people’s pockets, and lower mortgage rates prompt more people to shop for a mortgage, a recovery can eventually take hold.

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3 Responses to “Bad News Has Hidden Benefits for Mortgage Rates”

  1. S Landrum Says:

    While it is great news to have interest rates so low, it should be interesting to see how many of the actual refinance loans submitted recently will actually see fruition and/or see fruition at these low rates. I wonder if those who need interest rate relief the most will be able to take advantage of this?

    As home values decline, loan to value ratios increase for homeowners and many homeowners simply do not have at least 20% equity any more after seeing their home’s value drop 25-35%. Low interest rates can become much higher after lenders start adding hits to the rate for higher LTV’s. Remember, too, that we have reverted to traditional lending practices–without income and asset documentation to support a debt to income ratio of 40% or less, borrowers again can have a hard time qualifying for a good mortgage loan.

  2. D. Hoff Says:

    For the last six months I’ve been considering purchasing a home. I have a stable job and can afford a down payment of around $20,000, as well as mortgage payments of around $1,500. If you were in my position, would you go ahead and buy now or wait a while?

    Thanks!

  3. S Landrum Says:

    Dear D. Hoff,

    Interest rates are great right now for home buyers and it is definitely a buyer’s market. Also, there are some great tax incentives out there to encourage home buying on top of the interest write-offs you will have as a homeowner. It really is a great time for those who are interested in buying and have the resources.

    My suggestion is to talk to a reputable lender and get pre-qualified for a home loan. This way you will be prepared when you are ready to make a move. Make sure your loan officer is licensed and in good standing with the state you are in. Get referrals!

    Any loan officer you talk to needs to give you a Truth in Lending Disclosure and a Good Faith Estimate. This will give you all the details and cost of a mortgage. Also, with 30 year fixed rate interest rates at 5% or so I would seriously look at one of these versus a varible rate mortgage.

    Please write back if you have any questions. Sheryl

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