Real Estate Toronto Canada

Is this the turning point we’ve all been waiting for? Is the economy finally starting to gain traction, and is this the start of a real recovery? Are the low interest rates we’ve gotten used to, really gone for good? This week seems like a turning point, but we won’t know if it is for months, at least. This could just be a head fake before we slip back into a downward trend. Or it could be the start of a slow, but meaningful recovery. Even if this is the real thing, we aren’t going to be on the fast track any time soon. Unemployment is still too high and the housing market is still on life support, so even though we are much improved from where we were a year ago, there is still a long way to go. But this does look like a turning point, and there is a lot going on relating to mortgage markets. Any type of recovery is good news, but it may be unwelcome for those who are still waiting to pull the trigger on a home purchase or mortgage refinance.

On Wednesday the Fed officially exited the mortgage backed securities market. Since December of 2008, when the financial markets were still on the verge of collapse and the housing market was as fragile as it has ever been, the Fed has been the back stop for the mortgage market. By buying up the extra supply of mortgage bonds (which are the basis for mortgage interest rates) they stabilized the market and kept home mortgage rates low. Over this time, the Fed spent $1.25 trillion to buy these mortgage bonds, and without this support the housing market would be in a whole lot worse shape than it is now. But this support has come at a price. First, of all, we will have to pay for this eventually, and the money spent on buying these bonds has come from a combination of taking on new debt and quantitative easing, which is another way of saying that the Fed printed up new money to pay for these bonds. Both of these actions can potentially lead to inflation (deflation was the bigger worry at the time, and is still a concern) and if inflation takes hold, this could be a bigger problem down the road. The other problem is that the mortgage backed securities markets grew used to having the Fed as their best buyer. This took a lot of volatility out of the market, and made the market more reliably predictable. It has gone back and forth in a set range for months. Now, even though everyone knew the Fed was exiting at the end of April, and they have been buying less and less over time, the market jumped higher as soon as they left. We will see over the next few weeks if this was just a nervous tick of a move, or the start of an upward trend. It makes sense that owning these bonds is riskier now without the Fed support, and interest rates have to go higher to make up for the increased risk. At the same time, the housing market still needs the support, and high mortgage rates could kill off any housing recovery. If rates swing too high, expect that the Fed will step in somehow, to keep rates affordable.

The other big news this week was the release of the unemployment report on Friday. This is always the most watched indicator, and a big sign of where the economy is heading. This report was different than others, though, because this report showed the economy adding jobs for the first time, in ages, and was the best report since March of 2007 (which is now looked at as when the recession actually began). The report showed 162,000 new jobs created, and the January and February reports were revised upward to show an additional 62,000 new jobs crested. The report wasn’t entirely rosy, though. The unemployment rate still stands at 9.7%, and those who are considered long term unemployed, who have been seeking a job for 27 weeks or longer, grew by another 4440,000 and is at a distressingly high level. Also, 44,000 of the new jobs were census workers, temporary government jobs. But temporary workers spend money, too, and there was strength in nearly all areas of the jobs report. The rate of unemployment is sure to stay high for a long time, but this does look like this is a real move in the right direction.

Mortgage rates popped about a quarter point higher last week, the biggest increase in months. Rates are still low, but the big question now is if this move higher is the start of an extended move or just a blip in the market. Experts have been warning for months that mortgage rates would have to go higher once the Fed withdrew its support, so I do think we have seen the last of the lowest rates. But the economy is still fragile, and everyone has a vested interest in keeping mortgage rates low. So I expect there will be sharper swings, both up and down, but I don’t think rates will go a whole lot higher for an extended period of time. We will see how this develops over the coming weeks.

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Peter Thompson 630-479-6424