Do you see a recession in our future? Now is a good time to take advantage with a refinance or home purchase.
GDW Did you ever wonder what would happen if we enter a recession over the next year? Well today on Mortgage Monday we learn how an economic slow down may not hurt your pocketbook as much as you might think.
GDW I like the sound of that. And here with more of that is Chong Yi of The Yi Team at Fairway Independent Mortgage Corporation. Welcome back.
CHONG Hey, thank you.
GDW That’s good news that we can take advantage if we get into a recession. But where are we right now with the economy?
CHONG So I was a little concerned about this because when I was talking to my girlfriend Lorraine, better half, life partner. I said we were going to talk about recessions, inflation, inverted yield curve, and all that good stuff. And she said, “are you sure”? Because it’s really boring and I hope that I don’t bore anyone here. However, it’s important.
GDW It’s important.
CHONG Whenever we hear stuff like recession people freak out. Do we truly know what it means? The true definition of recession is two straight quarters of slowing economic growth. So what does that really mean? It means less money is being pumped into the economy and that causes it. It doesn’t necessarily mean doom and gloom for all of us. Let’s first talk about what a recession is and what drives it and what drives interest rates. What drives interest rates is inflation. The higher the rate of inflation means there’s more dollars chasing less product. Which means it becomes more costly to buy stuff and there’s less stuff out there to buy. Boring as heck.
“A recession is 2 straight quarters of slowing economic growth.”
CHONG So what does that mean? It means that it drives to recessions. Recessions means that, we talked about the definition. In actuality it’s a good thing.
GDW How is the recession a good thing? People live through the great recession a few years ago and maybe they remember the recession from the early 90’s. What’s in it for people to look at it head on and say I can get something out of this.
CHONG Two things really happen. Let’s talk about how and why. So two things happen. 1) interest rates go down lower. 2) Housing becomes more affordable. Clearly, lower interest rates and more affordable housing means more people are going to buy and values are going to go up. That’s the good part about it.
CHONG Now let’s talk about why it gets there. I talked about an inverted yield curve. All that means is that there is as much money to be made on a long term treasury as there is on a short term treasury, which isn’t good. You know when you start to get sick you get the sniffles. When you see, and this is where it’s going to get boring. When you start sniffling it’s a sign of something bad is going to happen. When you have a high, like a 10 year treasury that’s lower, it means there’s something bad going on.
GDW It’s a precursor.
CHONG What the Fed should do is raise short term rates to reduce short term rates. We have some charts here. I can barely see them, but that’s exactly what we’re talking about.
GDW 10 year treasury yield. That’s what you’re talking about.
CHONG That’s what I’m talking about. So there’s a “sickness” in our economy and that’s where our federal reserve needs to reduce rates not raise rates. So what does that mean going back? The true indicator of a recession ties directly with unemployment. What do I mean by that? We’ve talking about how unemployment has been really low.
“The true indicator of a recession ties directly with unemployment.”
GDW Right. Here’s an unemployment chart.
CHONG Throughout history when unemployment gets to it’s lowest point and it starts to rise, that’s when a recession starts to happen. It’s happened throughout history. Let’s say people are getting hired. You get jobs, unemployment is low. So you’re pumping money into the economy. Yayy! Everything is great. Right? People are buying more stuff. The economy is great. Well, if it starts to slow down a little bit, and people start to get laid off.
GDW Last in, first out.
CHONG Correct! So when the unemployment starts to go back up, what happens? The people who were pumping money into the economy…
GDW The people no longer have that money to pump in.
CHONG That’s right. Do you want to go out and have that expensive dinner or do you want to save it for a rainy day? And that causes deflation. Totally different conversation. However, it’s a great trigger. The real negative on the recession is how it’s going to effect your stock prices. If you’re continuously investing dollar cost averaging over time it’s going to offset. The best part about it, interest rates are lower so what you can buy today is going to be less expensive tomorrow so you can buy more house. If there are more people buying, housing values go up.
GDW Right, so there’s more competition. It’s always a good time to buy a house you say. The state we’re in right now, what’s the interest rate right now?
CHONG We’re in the higher 3%.
GDW That’s great!
CHONG That’s awesome! So if you want to refinance, give me a call.
GDW Can it go down even more?
CHONG It can. We’re not even into the true recessionary period right now and we’re talking about mid to low 3%. So I had this conversation with a lot of my clients and they say “then I should just wait.” And I say if you wait, interest rates are low. There’s no way you can find the best time. But if it goes low and you want to buy something, the price of the house could be 10-15% higher.
GDW The big thing here is we’re not headed to another Great Recession, right? This is just another cycle in the economy where things slow down. If people are fortunate enough to hold on to their jobs and they’re ready and fit for a mortgage they are going to get deal.
CHONG That’s right.
GDW Thanks so much Chong for that information.
GDW Thank you. Now is the time as you head to refinance or purchase that home that you have been looking at.
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