Uncertainty Looms as Economy Poised for Recovery

Real Estate

The 30-year fixed-rate mortgage rate has been known to follow, albeit loosely, the 10-year Treasury yield. The latter is a widely tracked economic indicator and serves not only as a sign for the pulse of the U.S. economy, but also as a premium for pricing myriad financial instruments, upon which characteristics specific to the financial instrument are added.

Throughout the latter half of the first quarter of 2020 and April and May, the 30-year fixed-rate mortgage rate declined steeply, due to the economic and financial distress wrought by COVID-19. As many analysts are predicting a V-shaped recovery from the virus-induced slump, instead of a U-shaped recovery, they cite the recent disparity between the 10-year Treasury yield and 30-year fixed-rate mortgage rate as a cause for concern for prospective homebuyers and existing homeowners who wish to refinance.

As can be seen from the above figure, the spread between the 30-year fixed-rate mortgage rate and the 10-year Treasury yield quickly expanded at the beginning of February of this year and peaked in April. This was a sign of economic distress and uncertainty, particularly as a view of the housing market. However, as housing data has outperformed, and stands ready to lead the economy in a recovery, the spread between the Treasury rate and mortgage rates is closing. This is a positive sign for the economy, existing homeowners seeking to refinance and prospective homebuyers

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