Two Steps Back

I am sure you have heard the old saying, "One step forward and two steps back." That is, in my opinion, what the United States economy has been doing over the last several months. It seems as though we start to witness improvements that create enthusiasm that our economy is showing signs of beginning to pull out of the downturn, and then... Wham!, more poor economic news such as last week’s release of the “Employment Situation,” which reported the national unemployment rate at a new high of 6.1%, on the heels of the most recent initial jobless claims report, which spiked back up to 444,000 (although all of the labor news wasn't bad given that in healthcare we have added 367,000 jobs year-to-date). Another good indication of how fast economic sentiment is changing is the fact that all last month experts focused on inflation, and now their concern has changed to deflation. So what are today's headlines, and how will today's changes impact on our economy, good or bad?

Today's headlines are all about the Fed bailing out mortgage giants Freddie Mac and Fannie Mae. Is this good or bad? Wall Street liked the news early as stocks rallied. Most of the articles I have read indicate that this will lead to lower interest rates for would-be homeowners. It would be even better news if it means that folks who are in a tough position given that their short-term rates have adjusted higher could refinance and stay in their homes. Unfortunately for these individuals, the lower rates are going to come with a much higher scrutiny over credit ratings, etc. There is also good news in the fact that folks who are currently living with an adjustable rate, interest only, etc., kind of mortgage who have maintained good standing and have not missed any payments will be able to capitalize on this move by the Fed to lock in a low, fixed rate. If you are in this position be ready to strike once the impact makes its way through your financial institution.

Could this move be the first step in solving the housing crisis after last week's report of foreclosures being at an all-time high? Not yet. It is going to take much, much more to recover, but as I mentioned earlier in this article, it was once again time for the "one step forward" after taking "two steps back" last week.

I personally think that lower interest rates will spur the purchasing of both new and existing homes. Yes, I said it, and, yes, I am an optimist at heart. Even with the high unemployment rate, there is still a group of would-be first-time home buyers that have been waiting for the perfect time to step into the wonderful world of home ownership. I also believe that there is another group, one that is focused on investing, who will also take advantage of the lower rates to scoop a deal on a second home or vacation rental to pad their portfolio with good tax advantages in planning for their future. If both of these scenarios come to fruition, it will be a nice "step forward" again for the economy which could even extend into the labor economy.

Keep a close eye on mortgage rates if you are a potential first-timer, or if you are in the market to refinance. All of the articles I have been reading foresee the 30-year fixed dropping below 5.5%. Let's keep our fingers crossed!

What kind of impact do you foresee the Fed's move to take over the mortgage giants having on your local economy and local labor situation?