Mortgages and the economy: A love-hate relationship

A new employment report released in early May brought some unexpectedly good financial news for the US economy. This renewed hopes that growth would finally accelerate, but anyone planning on getting into the mortgage market in the months ahead may well have mixed feelings about this news.

You see, there is something of a love-hate relationship between the mortgage market and economic growth, meaning what’s good news for the economy in general may hold some bad news for potential home buyers and refinancers.

First the good news

On May 3, the Bureau of Labor Statistics (BLS) released its employment report for the month of April, showing that 165,000 new jobs had been created during the month. 165,000 is not a spectacularly good number for employment growth, but it was a breath of fresh air after a disappointing jobs report for March had previously shown an employment gain of just 88,000 the prior month.

There was more good news in the April employment report. Along with the job creation estimate for April, the BLS announced that the original estimate of 88,000 new jobs for March was revised upward by 50,000, and the estimate for February was revised upward by another 64,000 new jobs.

Add this all together – the employment estimate revisions plus the new jobs for April – and this one report brought news of 279,000 jobs which had not been known to exist previously. This is a key factor in tracking the economy's progress. Not only is job creation a sign of economic strength, but in turn those new jobs mean more paychecks are available to be spent, which further adds to the economy's momentum.

What’s there to hate?

You might think that this news would bring smiles all around, but improved growth could have potentially negative consequences for home buyers and refinancers.

First and foremost, new home loan and refinance rates are very sensitive to economic strength right now. A weak economy has meant low new home loan and refinance rates both because of slack demand and because of the Federal Reserve's strategy of driving interest rates down to revive the economy.

Potential home buyers have more at stake than losing the opportunity to capture low mortgage rates. Home prices have had a nice rally over the past year, according to the S&P/Case-Shiller Home Price Indices. They are still nowhere near their peak levels, but if the economy gains momentum, expect home prices to continue to rise, leaving some would-be home buyers left behind.

What’s there to love?

If an improving economy could push mortgage rates and home prices higher, what is there for potential home buyers to love about a good employment report? For one thing, the soft economy has meant tighter mortgage underwriting standards. That means fewer people have been able to qualify for a loan. A stronger economy would likely make mortgages more readily available.

Then there is the individual financial situation of each potential home buyer. Being able to afford a home and qualify for a mortgage depends greatly on your income and your job security. From that perspective, a stronger economy could put you in a better position to buy a home.

Those same factors come into play if you want to refinance a mortgage, but there is another reason for existing home owners to welcome good news on the economy. Depressed home prices in recent years have prevented many home owners from refinancing, even though refinance rates would have made it very rewarding for them to do so. If a strong economy can push home prices higher, more mortgages will move back above water and more refinancing opportunities should be created.

In short, while a strong economy may bring higher new home loan and refinance rates, it should also help more people qualify for loans.

This love-hate relationship between the mortgage market and the economy shows just how complex the variables that determine mortgage availability are. For the time being, low interest rates have given consumers an historic opportunity to buy a home or refinance a mortgage, but a change in these conditions may be as close as the next item of economic news.

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