by Rob Chrisman (Industry Expert) and Joe Zeibert (Managing Director of Global Mortgage Solutions at Nomis)
The US presidential election grabbed, and continues to grab, most of the headlines this month, second only to Pfizer’s phase three vaccine results. As it turned out (so far), the news has proved to be the catalyst for a dip in mortgage rates once it became clear the Joe Biden, as of this writing, would prevail but there would be no “blue wave” in the Senate that would have potentially led to an expedited large new stimulus package to combat the economic effects of the coronavirus pandemic. Although recounts and legal challenges may be the name of the game in the upcoming weeks, a Democratic president and pending two-run offs in Georgia, a potentially Republican Senate may lead to changes for lenders and consumers based on whomever finally comes out on top.
Let’s take a look at economic data released over the first week of November. We continue to see an economy that continues to improve in some areas and stagnate in others. Fortunately for our clients, residential real estate continues to benefit for two core reasons. First, a shifting preference for more space based on underlying changes to how we spend our daily lives as Americans, accelerated by Covid-19. Second, rents continue to rise, up 5.4% for a studio and 2.4% for a 3 bedroom, this coupled with increasing costs to maintain older buildings looks to be a trend that is not likely to reverse in the short term. As a result of these two trends, we have seen a boost to residential construction spending in September. Meanwhile, the service sector continues to struggle and increasing coronavirus cases makes it more difficult for close-contact services to see a similar recovery to manufacturing.
Additionally, the uncertainty around the pandemic, even with a potential vaccine off in the horizon, has led to an increase in COVID-related goods spending. Despite the economic headwinds, over 600,000 new jobs were added in October and that number is even more impressive as over 900,000 private-sector jobs were added. The unemployment rate hit 6.9% in October, down from record double-digits in April, while improving, in 2017, 8 years into the economic recovery, it was 4.8%. The jobless rate is now similar to what it was in 2009 in the early/middle of the great recession. This has a financial and emotional impact on consumers and in turn potential borrowers.
Economic output is lower than it was last year, given the pandemic. Some believe that an eviction crisis is coming. With coronavirus infection rates continuing to rise in late October and early November, there are signs that the improvements we’ve seen in the economy could slow or even reverse as we head into a rough winter with the potential vaccine at a minimum of 6 months away.
But liquidity, a huge plus for lenders, that had been frozen in some segments of financial services, ahead of the U.S. election is already thawing. While uncertainty remains over the election, COVID-19, lockdowns, Brexit, and the Next Generation EU fund, diminishing uncertainty into 2021 will allow liquidity to improve further. Additionally, consumers have increasing liquidity in their homes as US housing prices continue to climb M0M by a steady average rate of around 1.5%. More equity boosts the ability to refi as well as giving borrowers more potential money to go towards the purchase of a new home.
Other positive signs of liquidity in people’s pockets are that even though a turbulent 8 months with spikes and falls, US personal savings is $2.78T, up from $1.2T at the end of 2019. Couple that with personal spending being on the rise up to $14.58T from a trough of about $12T during the height of the crisis, and approaching its Jan 1, 2020, rate of $14.8T. This means that people are starting to feel good about spending again, while still retaining higher savings than a year ago and having more equity in their homes than a year ago as well.
But lenders care about mortgage rates. The uncertain outcome of the presidential election is leaving the capital markets… uncertain. At this point Vice President Biden has declared victory, and various news sources and organizations use the term “President Elect Biden.” But President Donald Trump has alleged voter fraud and is expected to pursue litigation over contested mail-in ballots to the U.S. Supreme Court.
How the result of the election will play out on markets remains to be seen. But many are anticipating a divided government (Democratic House of Representative, Biden presidency, and a Republican Senate unless the Democrats can accelerate fundraising in Georgia, which is underway now). So far, so good: Both stocks and bonds have “behaved themselves,” and stocks improved, and rates improved slightly. The markets expect that a healthy deal-making climate will return regardless of whether Biden or Trump is declared the ultimate victor.
So, what can lenders, and their borrower customers, expect? There are two huge variables: the election result, and the path of the pandemic. In general, people don’t thrive given uncertainty. Neither do the bond or stock markets. Uncertainty, whether it be politically or health, typically causes people to cut back on spending (in fact, the U.S. savings rate is over 14%, unusually high), buy things on credit, and causes companies to double or triple-think expanding.
But a slow economy, declining consumer consumption, and the decreasing demand for credit lead to lower rates, including mortgage rates. And when combined with demand by investors for yield, lenders and borrowers are benefitting. And although as time passes the political situation in the United States will be sorted out, the impact of COVID is a continuing saga with a new light at the end of the tunnel but an uncertain timeline. Even with the recent surge in the 10-year treasury, negative debt will put pressure on that hitting or pushing though the 1% hurdle and could even push it back down so we can expect rates to remain low well into 2021 if not beyond, and expect lenders to continue to help borrowers buy homes or save money through refinancing.
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