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Recession News Might Be Green Light for Mortgage Borrowers

It may only have confirmed what most people already suspected, but the biggest financial news of the week was the official announcement that the United States was already in a recession.

Two very different consequences of the slumping economy could be seen in other news of the week:

While the prospect of unemployment may be enough to give anybody pause, those low mortgage rates should be a green light for many borrowers.

Recession Hits Home with Unemployment

Many aspects of a recession can seem theoretical to the average person, but it hits home when someone in the household becomes unemployed. Each week seems to bring news of large layoffs by major employers, and at a lower profile, small businesses are also struggling and cutting back.

Unemployment is the most damaging consequence of a recession. First and foremost, it represents genuine financial hardship for families — something well beyond just cutting back a little. Second, unemployment prevents people from benefiting from the lower prices and interest rates that often characterize recessions. Third, loss of income means that even with cutting back, the unemployed cannot pay down credit, and this same loss of income can further prolong the recession. Perhaps most troubling of all, unemployment generally doesn’t peak until a little after a recession has ended.

What to Make of Lower Mortgage Rates

On the flip side, the U.S. has housing prices not seen since 2004, and mortgage rates that are close to their all-time lows.

Just a couple years ago, people who were on the outside of the housing market looking in despaired of ever being able to afford a home, given the extreme surge in prices. Now, home prices on average have fallen by more than 20% from their peak.

Meanwhile, at 5.53%, 30-year mortgage rates are within 30 basis points of their all-time low, and at levels rarely seen before.

So, what is a person to make of this, against the background of recession and unemployment? Are lower housing prices and mortgage rates an opportunity, or does the negative news dictate caution?

The easiest answer is for existing mortgage holders. For many reasons, the steep drop in rates signals a chance to refinance. For people who could save money by doing so, there is no reason to delay. Along with falling gas prices, mortgages refinanced at lower rates have the potential to put a meaningful amount of money back into many household budgets.

For potential new home buyers, the answer is trickier. It comes down to job security — and this can be a dicey thing in a recession. It is a question of both a person’s standing within a company, and the overall health of that company. Obviously, if a person’s job is in jeopardy, it is not a good time to buy a house, no matter how compelling market conditions may be. However, for people who are confident in their job security, current housing and mortgage conditions would seem to be signaling a green light on entering the housing market.

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