The Right Rx for Refinancing

The story of this economic recovery has been two steps forward then one step back, and the economy recently took another step backwards. The question is, will this help or hurt people who are hoping to refinance a mortgage?

One way to think of this is that any new piece of economic news is like a drug entering the body of the economy at large, and monthly employment figures are among the most powerful drugs out there right now. It remains to be seen whether the most recent dose of employment news will be good or bad medicine for refinancing.

A step back for growth

As officially measured by the National Bureau of Economic Research, the Great Recession ended back in mid-2009. Since then though, the Bureau of Economic Analysis reports that just five of the last 16 calendar quarters have seen real GDP growth of better than three percent, and only once have those quarters occurred consecutively. Growth overall has been anemic, and just about every time there's been an uptick in growth, the momentum has been lost almost immediately.

Real GDP growth increased from 1.1 percent in the first quarter of 2013 to 2.5 percent in the second, but recent figures on job growth suggest that the economy may have just taken another step backward. Employment figures from the Bureau of Labor Statistics show that job creation has taken a turn for the worse over the past couple months. After an average of 180,333 new jobs were created each month in the last half of 2012, and an average of 194,833 new jobs were created monthly in the first half of this year, job creation fell to an average of just 136,500 in July and August.

Job creation is not the only component of economic growth, but it is a particularly key indicator at this stage because unemployment has remained stubbornly high even though the economy technically is now four years into a recovery. So far, it looks as though job creation is not off to a very good start for the second half of 2013.

Keeping refinance rates low

While a slow economy creates a number of problems, one way it could help people who want to refinance is by keeping interest rates low. While rates now are more than a full point above the best refinance rates of earlier this year, according to historical figures from Freddie Mac 30-year fixed mortgage rates are still 1.5 percent to 2 percent cheaper than they were at the peak of the housing bubble.

People who bought near the peak may have been unable to refinance up till now because by the time refinance rates had dropped, declining home prices had destroyed the equity in their homes. However, through a combination of a recovery in home prices and a few more years worth of principal payments, that equity should have been restored by now in many cases. These home owners could still have a shot to refinance, as long as mortgage rates don't rise much further. Continued sluggishness in the economy should help keep mortgage rates low, both because of natural market forces and because that would probably prolong the Federal Reserve's intervention to hold mortgage rates down.

Will the real estate rally continue?

Part of the scenario described above depends on the continued recovery of housing prices. Of course, if the economy has a relapse, it could spell the end for that recovery. In fact, now that mortgage rates have risen, a combination of higher mortgage rates and falling housing prices could be the worst possible medicine for people who want to refinance a mortgage.

In a sense, what people who have been waiting to refinance need most is time - time in which both housing prices and mortgage rates are reasonably stable so they can build equity and still take advantage of low refinance rates. Whether they get that time may depend on a lack of dramatic economic developments in the economy for the rest of the year, for better or worse.

In summary, it looks as though it will take a delicate balance to refinance a mortgage over the next several months. There needs to be just enough growth to support housing prices, but not enough to send refinance rates soaring. It may seem odd to root for mediocre growth, but that seems like the right prescription for refinancing opportunities. In that context, the so-so employment report for August may be just what the doctor ordered.

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