Will good economic news signal the end of low rates?

Posted by  on Nov 21, 2013

The first week of November brought back-to-back positive developments for the US economy. Positive for most, that is, but not if you plan on being in the market for a mortgage.

Two rays of sunshine in November

The weather may be turning colder across much of the country, but economic news brought two rare rays of sunshine in early November:

  1. On November 7, the Bureau of Economic Analysis released its advance estimate of 3rd quarter 2013 Gross Domestic Product (GDP). This estimate showed that GDP grew at a real annual rate of 2.8 percent in the 3rd quarter. This was an improvement over the 2nd quarter's growth rate of 2.5 percent, and was a pleasant surprise coming at a time when many signs suggested the economy was losing momentum.
  2. The very next day, the Bureau of Labor Statistics reported that 204,000 new jobs were added in October, a fairly strong showing, especially when coupled with upward revisions to prior August and September estimates totaling another 60,000 new jobs.

The implications for mortgage rates

The basic formula for the mortgage environment is this: Some of the lowest mortgage rates in history have been a function of a persistently sluggish economy; therefore, when that economy shows signs of life, expect mortgage rates to start rising.

Early reaction to the recent economic news suggests that a bump in mortgage rates is to be expected. However, there is still reason for skepticism about how meaningful that news is. The GDP number is merely an advance estimate -- and measures a time period prior to the economy being disrupted by the government shutdown. That the October employment number could be so strong even while that shutdown was going on is more of an eyebrow-raiser, but the job market has shown a flash or two of strength before without being able to sustain it. Wait till employment growth can string together three consecutive months north of 200,000 new jobs before you conclude low mortgage rates are on their way out permanently.

Still, the improvement in the economic news and the resulting bump up in mortgage rates should serve as fair warning to anyone thinking of buying a house or refinancing a mortgage. When mortgage rates are so far below their historical norms, it would be foolhardy to expect them to last forever.

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