July 2009

How a Rising Unemployment Rate Can Help Mortgage Rates Fall

Last week’s jobs report is the latest data point to drag down rates for today’s home buyers and would-be refinancers.

As reported by the government, the national Unemployment Rate rose to 9.5 percent in June — a 25-year high.

As the percentage of out-of-work Americans grows, households have less disposable income to pump back into the economy. 

And so, because consumer spending accounts for two-third of the economy, the growing ranks of the unemployed are forcing markets to change expectations about when the U.S. economy will reach its full recovery.

Inflation is the enemy of mortgage rates.  The perceived absence of inflation, therefore, can be its friend. 

With fewer working Americans, we can expect slower economic growth plus a smaller probability for inflation over the medium-term. This is why mortgage rates are lower of late, off by as much as a half-percent from the peak.

What’s Ahead for Mortgage Rates This Week: July 6th

Mortgage markets were relatively calm throughout last week’s holiday-shortened trading sessions.

After trading within a tight range between Monday and Wednesday, a weak jobs report helped edge rates lower into the weekend.

For the second week in a row, mortgage rates ended the week lower than where they started – if only slightly.

Meanwhile, if it’s the expectation of runaway economic growth that fueled the early-June, mortgage rate run-up past 6 percent, it’s the tempering of those expectations that helped rates retreat by a 1/2 percent or more since.

While the housing sector continues to post strong numbers, employment is showing that it may not rebound as quickly as previously thought and U.S. consumer confidence remains shaken.

The Unemployment Rate rose to its highest levels in 25 years last month and key confidence levels fell. 

With negative job growth and falling consumer optimism, it only makes sense that mortgage rates would fall — fewer people are working and the public feels uneasy about spending its money. 

This week — without much new data due — market momentum could push rates even lower.  In general, perceived weakness in the economy will be good for mortgage rates and strength will be bad.

However, there’s a wildcard.

This week, some of the world’s largest nations are expected to call on a replacement for the U.S. dollar as a global currency reserve.  Depending on how serious the discussion grows, the value of the U.S. dollar could be negatively impacted and that would spell bad news for rate shoppers.

A weakening U.S. dollar is linked to higher mortgage rates.

Mortgage rates remain favorable and unpredictable.  If today’s rates make sense for your household budget, consider locking in.  Rates won’t likely end the week at the same levels at which they started.

Home Prices Show Improvement in 19 of the 20 Case-Shiller Markets

Here are some of the headlines about the story:

• Case-Shiller Home Prices Decline Only 18% (Business Week)
• Case-Shiller Less Bad (Seeking Alpha)
• Home Prices In 20 Cities Drop Less Than Expected (Bloomberg)

Now, the headlines feel negative, but they’re actually highlighting some key strengths in April’s figures.  For example, nearly half of the Case-Shiller markets posted gains in April and all but one showed month-over-month improvement.   

It’s a step in the right direction but doesn’t mean that housing has turned around for good. 

We have to be careful about how we interpret the Case-Shiller Index because it’s an imperfect housing gauge.  The most obvious Case-Shiller flaw is that it only measures home values in 20 cities nationwide and they’re not even the 20 biggest cities.

Houston, Philadelphia, San Antonio and San Jose are excluded from the report and each ranks among the country’s 10 most populous areas.

That said, the report is still important because the Case-Shiller Index identifies broader housing trends and that helps to shape economic policy.

Not only versus last month but also versus last year, the pace at which home values are falling appears to be getting slower.  This is the third straight month Case-Shiller has reported as such.

Now, three months makes a trend, but the data has to stay strong through the summer months to mark a bona fide turnaround.  If the Case-Shiller Index shows strength for May and June, it could be the signal for which the markets have been waiting.

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