The title of today’s blog is from this recent WSJ article (as always, we can send key excerpts to non-subscribers).
The article quotes Fed Chairman Jerome Powell, as he pointed out how strong consumer spending and employment numbers indicate that the U.S. economy remains robust and should retain its health into the near future.
Inflation also remains tame and the dreaded recession-indicating “inverted yield curve” (where short-term rates are higher than long-term rates) has disappeared.
RECESSIONS ARE GREAT FOR THE MORTGAGE INDUSTRY
This matters significantly b/c most of the mortgage industry is literally counting on a recession.
This is b/c many of America’s largest mortgage lenders rely almost entirely upon refinances to survive.
And recessions (actual or pending) tend to push mortgage rates down, making continued refinances more than viable.
If a recession does not come and rates go up 1/2%, we will see an industry-bloodletting like we have never seen before.
It will be mortgage Armageddon.
RECESSIONS ARE GOOD AND BAD FOR REAL ESTATE
The rate reductions that come with recessions can be good for real estate, as the increased buying power sometimes brings more buyers to the market.
But, the large rate reductions in 2019 did not stimulate buying as much as many industry-watchers expected. Hence, the “good” is probably outweighed by the bad.
Recessions are bad for real estate b/c they make buyers nervous and much more likely to sit on the sidelines until more “certainty” returns.
Further, when the economy is soft, incomes drop (reducing buying power) and employees tend to move less for a variety of reasons, further reducing demand for homes.
WHAT WOULD PUSH RATES WAY UP?
The above-referenced article mentioned one more event that would really push rates up – a thawing of trade tensions (particularly with China).
President Trump is going to push hard for a trade deal prior to the election next year, and if he succeeds it will be seen as a tremendous boon to the economy (and rates will shoot way up in response).
Given Mr. Trump’s need for a boost, this scenario seems relatively likely.
DON’T RATES ALWAYS GO DOWN IN AN ELECTION YEAR?
In a word – no 😊.
“Rates falling in election years” is a myth that everyone repeats even though there is little evidence to support it. Here is a great blog by a Florida Loan Officer, Chris Doering, setting out the data.
POLITICS
There is one more reason recessions matter so much – politics and regulations. If the economy remains strong, it is much more likely that President Trump will get re-elected.
If the economy is weak, however, it is more likely that a Democrat will re-take the White House. This matters b/c the Democrat candidates are more likely to reinvigorate the CFPB and regulations in general.
And this will likely make lending tougher in general.
NOTE: I am not advocating for one candidate over another.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167
