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.
Thequestion is whether this is an early but alarming sign of an impendingrecession?
Byreading the chart, one would panic and think that the US economy is about tofall off a cliff. Be watchful, we are about to see the same film on every mediaoutlet that was premiered during the financial crisis; but the reality is a bitdifferent. Yes, it is highly likely that the U.S economy may experience someslow growth and a possible technical recession. Still, I doubt we will witnessa recession as bad as the financial crisis. A severe recession in the USeconomy would most likely only occur if corporate default rates began to tickhigher, and consumers were unable to pay their debt installments.
So far,the US Job rate is sitting at a record low level, and consumer confidencehasn’t taken any major hit either. This is all despite the US already feelingthe 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 hasthe U.S housing refinance rate spiked?
Thereason that we see the housing refinance rate spike at this level is purely thatconsumers want to take advantage of the lower interest rate environment. TheFed will continue to push the interest rates lower to provide an extra cushion whichgives incentive to homeowners to refinance their properties at a much cheaperrate.