Dow Falls 1000 Points: Why Angst is your Friend

Worries are permeating the investor’s psyche. This is reflected in the recent drop in equity markets. The Dow Jones Industrial Average fell as much as 1,000 points in a single day, or more than 6%. It recovered a chunk of these losses but was still down 3.6% that day. The market is officially in a correction, with percentage losses in the double-digits since just last month.

This is being fueled by concerns over China’s slowing economy, and the fear it will spread globally. We think these are overblown for our economic outlook. In any case, their unexpected good news for home buyers.

Flight to safety

This nervousness may be painful when examining your brokerage statements, but the sluggish stock market has proven beneficial in one important aspect.

The equity and bond markets may seem distinct and separate. However, the two are interrelated. The volatile equity market has caused investors to seek the safety of Treasury securities. Therefore, the ten-year Treasury yield has fallen recently.

This is important since fixed mortgage rates, including the ever-popular 30 years, is based on this government bond yield. The yield on the 10-year bond is now hovering around 2%, after reaching 2.5% in June. According to recent data from Zillow, the 30-year mortgage rate is 3.67%, a four-month low. This is down from 3.79% just a few days ago.

Freddie Mac only does monthly average rates, but it shows mortgage rates averaged 4.05% in July.

Lower rates add up to excellent savings. Assuming a $500,000 mortgage, your monthly savings would equate to $75 a month. This may not seem like much, but this results in $27,000 in savings over the life of the loan.

The Federal Reserve

The Federal Reserve may decide to hold short-term interest rates at rock bottom rates a little longer. Widely expected to begin raising rates next month, the latest turmoil in the equity market and global economy may cause the Fed, led by Chairwoman Janet Yellen, to wait for another meeting.

Although the central bank’s actions primarily impact short-term rates, those with an adjustable-rate mortgage will receive a nice reprieve.

Meanwhile, the economy is in good shape

A lower mortgage rate is a nice boost to your pocketbook. However, it means little if the economy is turning sour. Concern turns towards job security and more mundane purchases rather than large outlays such as a home.

We see little evidence of our economy slowing down. This week, a consumer confidence index rose to 101.5 compared to the prior level of 90.9. This is an important indicator since the majority of our economy is based on consumer spending, and the positive feeling could lead to increased shopping. Furthermore, those describing it as hard to find a job dropped from 6.5% to 21.9%.

The labor market has continued to improve. In July, there were 215,000 jobs added, and the unemployment rate was 5.3%.

Gross Domestic Product (GDP was 2.3% in the second quarter. It is based on the government’s advanced estimate. This was a nice rebound from the first quarter when bad weather held it to a 0.6% gain.

The question is how much China’s slowing economy will impact our growth. Although a weaker Chinese currency makes their exports more competitive, this is not a major driver of our economic growth. It generally represents a mid-teen percentage of GDP.

Conclusion

The recent drop in the stock market may be inflicting damage to your pocketbook. However, the impact on the housing market is likely to be minimal. You can benefit by locking in low mortgage rates.

Although long-term rates have remained low for a considerable period, this will not remain the case in perpetuity.