Here’s a look at the latest developments in the mortgage market this week.
- May’s surprise job recovery could drive mortgage rates up
- Refinance or forbearance: which is right for you?
- Federal Reserve expected to support long-term stabilization
- More signs of recovery in the housing market
May’s surprise job recovery could drive mortgage rates up
Although economists had predicted a further loss of 8M jobs in May, the Bureau of Labor Statistics jobs report showed a net gain of 2.5M for the month. This news spurred hopes that a quick recovery has already started, with the hardest hit sector, hospitality, gaining the most jobs back. However, with good economic news comes the possibility that mortgage rates could shoot up again. As evidenced last week, signs of economic growth often trigger traders to sell bonds, causing interest rates — including mortgage rates — to rise.
As much steam as this upturn currently has, sustained recovery is still not a guarantee. Unless extended by Congress, programs that eased some of the country’s economic hardship (i.e. the Payment Protection Program, unemployment benefit increases, stimulus checks) are set to come to an end in July. Despite the jobs report showing some gains, the unemployment rate is still likely between 13 and 16%, far exceeding the peak of 10% during the Great Recession. A “second wave” of economic hardship is certainly possible if the US economy is faced with a string of bankruptcies, and continuing unemployment in the third quarter.
The takeaway here is: mortgage rates may still be volatile from day to day, as they depend more on the market’s response to new economic data than they do on the data itself.
Refinance or forbearance: which is right for you?
In March, Congress passed the CARES Act which, among other things, makes it easier for homeowners to put their mortgage in forbearance. Relief from payments can be a critical lifeline for those faced with sudden financial setbacks that could lead to foreclosure. However, for those looking to reduce their monthly debts, forbearance may not be the best option. With mortgage rates reaching record lows, choosing to refinance may save homeowners more money in the long run than opting for forbearance.
Federal Reserve expected to support long-term stabilization in September
The Federal Reserve is contemplating a rarely implemented policy of buying government debt to keep interest rates for US Treasury bonds at specified targets. For example, the Fed could pledge to buy as much debt as it takes to keep the return on 2-Year US Treasury bonds at .25%. This action would give investors confidence that they’ll continue to see steady returns, and keep prices for US bonds high. Since lenders tend to drop rates when bond prices rise, this could mean good news for borrowers until the risk of deflation is mitigated.
More signs of recovery in the housing market
With purchase applications up, and a summer homebuying boom expected, mounting evidence continues to show steady recovery in the housing market.
- Purchase applications made steady week-over-week gains for the seventh week in a row.
- The percentage of mortgages in forbearance dropped last week for the first time since the crisis began. The rate dropped from 9% to 8.9%, signalling that some of the economic pain may at least be stalling.
- Housing agencies like the FHA are rolling out policy changes designed to help those still in forbearance during the recovery.
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