Stealing Back the Economy

It's Christmas morning. The villagers awake to find every visible trace of the holiday has been has been stolen from them - every bauble, present, and morsel. So what do they do?

The gather and sing, celebrating the joy of the season. And so the Grinch's efforts to steal Christmas are foiled.

For much of this year, it has seemed that politicians in Washington are attempting to steal the economy - first with the sequester, then with the government shutdown, then with the debt ceiling standoff. Even the latest "resolution" to the budget and debt ceiling disputes simply pushes back their timing so that the next confrontation could loom over the holiday season like the Grinch's shadow.

And yet, like those funny-looking folks in Whoville, it seems the American public may be, just may be, trying to steal the economy back from Washington. How successful they are could set the tone for home buying, refinance rates, and home equity in 2014.

Shutdown, what Shutdown?

The government shutdown in October not only directly cut off several contributors to the economy, but it created a climate of uncertainty which threatened to dampen economic activity in the weeks leading up to the shutdown. Despite this, two key economic reports released in early November seemed to suggest that the American private sector had shaken off the turmoil in the federal government.

The Bureau of Economic Analysis announced that GDP grew at an inflation-adjusted rate of 2.8 percent in the third quarter. This figure is just an advance estimate - two formal revisions will follow - but if it proves to be accurate it would be an improvement over the second quarter's growth rate of 2.5 percent, and would be tied for the best quarter in the last year-and-a-half. This would seem to refute the impression that economic activity had slowed to a crawl in anticipation of the October 1 government shutdown deadline.

The day after the GDP announcement, the Bureau of Labor Statistics chimed in with a report stating that a net total of 204,000 new jobs had been created in October. This represented an above-average rate of job creation compared to the prior year, and a reversal of the apparent slow-down in job creation in September. This robust job growth is especially impressive since it occurred when the government shutdown was going on.

It's way too early to say for sure, but it may just be that the private sector is stealing the economy back from the politicians. If so, what does that mean for the direction of mortgage rates, refinancing, and home equity values?

Mortgage and Housing Implications

It is generally agreed that a stronger economy would lead to higher interest rates - in part, because it would allow the Federal Reserve to end its active intervention in the financial markets to reduce long-term rates. A stronger economy should also allow the housing recovery to continue. Here's what all this would mean for some key components of the mortgage and housing markets:

  • Home buyers. Home buyers would face challenges in a strong economy. For one thing, the era of low mortgage rates might finally end, and potential buyers would also face rising home prices. On the plus side, an improving economy would put people in better position to afford to buy, and would also make credit more widely available.
  • Refinancing. Rising refinance rates could make it less attractive to refinance a mortgage, even while rising home prices were restoring the equity levels often necessary to refinance. Alert home owners might just hit the sweet spot when refinance rates are still low enough and home prices are just high enough.
  • Home equity. With all the home equity that was destroyed when housing prices collapsed, the market for home equity loans largely dried up. In an improving economy that market could be restored, as home equity levels recover, and lenders become more confident about making loans.

If an improved economy helps stabilize the housing market, higher mortgage rates would not be the end of the world as long as they remain moderate. Remember, according to the Federal Reserve the long-term average for 30-year fixed mortgage rates is just over 8.5 percent, so even if they rise a point or two above their October average of 4.19 percent, 30-year mortgage rates would still be relatively cheap from an historical standpoint.

The key towards finding the right balance between a strong economy and reasonable mortgage rates may be keeping inflation in check. After getting out of hand in the 1970s and 1980s, inflation has been kept at 3.0 percent or lower for 15 out of the past 20 years. If low inflation can continue even as the economy improves, it could all add up with a happy ending worthy of a holiday special.

Speaking of which, remember that in the end, the villagers in Whoville not only stole Christmas back from the Grinch, but they convinced him to join in celebration with them. Who knows (pun intended and apologized for) - if the positive spirit of the American consumer and business communities can be sustained, it just might get through to the Grinches in Washington.

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