Now that the elections are over, one of the biggest questions facing our economy is what will happen as we approach the “Fiscal Cliff.” Read on to learn what this is about-and what it could mean for home loan rates.
Last week, President Obama was re-elected to a second term in office and the market’s take is that the Fed will continue its latest round of Bond buying (known as Quantitative Easing or QE3) until the labor market and economy improve significantly. While recent Jobs Reports have shown modest improvement in the labor market, it is still a fragile area of our economy. For instance, September’s Job Openings and Labor Turnover report (JOLTS) came in at its lowest reading since April. However, the number of job openings did increase by two percent from September of 2011, signaling a ray of hope for the labor market.
With QE3 in process and the elections over, the buzzword on Wall Street as we approach 2013 is “Fiscal Cliff.” What is the Fiscal Cliff and why is it significant? Essentially as we head into 2013, tax cuts for individuals and various tax breaks for businesses are due to expire, taxes pertaining to President Obama’s health care law will begin, spending cuts enacted by Congress as part of the debt ceiling deal of 2011 will go into effect, and long-term jobless benefits will expire. The Congressional Budget Office (CBO) estimates that if all of these items occur, it could take an estimated $600 billion out of the U.S. economy in 2013, pushing the country into a recession.
So what does this mean for home loan rates? The issues surrounding the “Fiscal Cliff” will be talked about from now until the end of 2012 and that spells a lot of market uncertainty, which typically results in investment dollars moving from Stocks into Bonds-thereby improving home loan rates (which are tied to Mortgage Bonds). In addition, continued concerns over the debt crisis in Europe and more riots in Greece will likely keep investors in the safe haven of our Bond markets, which will also benefit home loan rates.
However, a big issue we need to continue to monitor is inflation. One of the goals of QE3 is actually to create inflation. And remember, inflation is the arch enemy of Bonds (and therefore home loan rates) as it reduces the value of fixed investments like Bonds. This is an important issue to watch in the weeks and months ahead.
The bottom line is that now is a great time to consider a home purchase or refinance, as home loan rates remain near historic lows. Let me know if I can answer any questions at all for you or your clients.