Worse News is Good News for Mortgage Refinances and New Home Loans

February 26th, 2010

In the market for a mortgage refinance or new home loan? Bad economic news is generally good news for you. When economic data is released that show that the recovery is stalled or slowing down, interest rates are expected to stay low longer to help boost economic growth.

For the week ending February 25, the bad economic news was good news for those looking for lower mortgage rates. Here are some of the key data released this past week and how it impacts interest rates.

Confidence Takes a Hit

On February 23, the Conference Board released its Consumer Confidence Index for the month of January. After increasing for three straight months, consumer confidence dropped 10.5 points (to 46 from 56.5) and was well below expectations. When consumer confidence is low, there is a corresponding decline in spending. Approximately 70% of our economy is based upon consumer spending, so when consumer spending stalls, so does economic growth. This news caused mortgage interest rates to drop.

Bernanke Talks

On the same day that the Conference Board released its consumer confidence figures, Federal Reserve chairman Ben Bernanke spoke with members of the House Financial Services Committee. Bernanke cited “moderate” economic growth as he tried to balance optimism with tempered expectations. Of greatest interest to homeowners and home buyers, Bernanke indicated that interest rates will need to stay exceptionally low for an extended time to aid in economic recovery and growth.

New Homes Sales Hit Low

A key housing indicator, new home sales in January, was released by the US Commerce Department on February 24. The news was not good for home builders–the number of new home sales barely cleared 300,000 units and was the lowest number in over fifty years. Partly due to weather, but mostly reflecting the consumer confidence numbers, the drop in new homes sales was further news that the economy in January was not showing indications of strong recovery just yet.

Initial Claims Rise Again

On February 25, the US Department of Labor released its latest data on initial jobless claims. This number reflects the number of Americans who filed initial claims for unemployment insurance the prior week. The number of claims was 496,000, well above expectations and following a recent trend of rising claims. Mortgage interest rate markets reacted immediately with a drop in rates.

Employment is one of the key economic indicators for economic recovery and growth. As long as the number of Americans out of work continues to grow, interest rates will continue to stay low and there will be resistance from the Federal Reserve to increasing rates that affect consumers and mortgage interest rates.

Mortgage Applications and Weekly Mortgage Interest Rate Index

The Mortgage Bankers Association released data for mortgage applications and mortgage interest rates for the week ending February 19, 2010. Following a recent trend, applications dropped 7.3% for the week. Of particular note was the new home loan applications for purchase transactions, which dropped to their lowest level since May 1997. Mortgage refinances also declined and are now making up a smaller percentage of all mortgage applications, at 68.1%.

The national contract rate for a 30-year mortgage increased for the week ending February 19, mostly due to the Fed’s increase in the federal discount rate charged to member banks. (The average 30-year fixed-rate mortgage was 5.05% at 1.34 points at the end of the week, up considerably from the 4.94% and 1.09 points the week before.) However, the latest economic news means that the benchmark 30-year rate for residential mortgages will most likely be lower for the week ending February 26.

This week provided some grim economic news for economic recovery, and mortgage interest rates are dropping as a result.

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