The U.S housing market makes the backbone of the U.S economy, and any weakness in this sector look spineless. During the financial crisis of 2007 and 2008, it was the U.S housing sector that pushed the economy over the edge and into a period of a prolonged recession. People were out of jobs and couldn’t keep up with their payments, and the U.S housing refinances rate skyrocketed. The same housing refinance rate has touched a level that hasn’t been seen since the financial crisis, as shown in the chart below.
The question is whether this is an early but alarming sign of an impending recession?
By reading the chart, one would panic and think that the US economy is about to fall off a cliff. Be watchful, we are about to see the same film on every media outlet that was premiered during the financial crisis; but the reality is a bit different. Yes, it is highly likely that the U.S economy may experience some slow growth and a possible technical recession. Still, I doubt we will witness a recession as bad as the financial crisis. A severe recession in the US economy would most likely only occur if corporate default rates began to tick higher, and consumers were unable to pay their debt installments.
So far, the US Job rate is sitting at a record low level, and consumer confidence hasn’t taken any major hit either. This is all despite the US already feeling the influence of Coronavirus.
Moreover, the Fed is highly active at addressing the weakness in the markets caused by Coronavirus, which could lead to liquidity issues. During the past couple of weeks, the Fed has come out of their closet and announced an emergency rate cut of 50 basis points, but the story doesn’t stop there. The Fed is also expected to cut the interest rate even further during their upcoming meeting on the 17th March. Wall Street expects this cut to be in a range of 75 to 100 basis points. If the Fed delivers that bazooka, it will surely have a positive impact on the markets.
So, why has the U.S housing refinance rate spiked?
The reason that we see the housing refinance rate spike at this level is purely that consumers want to take advantage of the lower interest rate environment. The Fed will continue to push the interest rates lower to provide an extra cushion which gives incentive to homeowners to refinance their properties at a much cheaper rate.