What is a cash-out refinance? The cash-out refinance definition involves a refinance, where you first can take advantage of a better rate in order to lower your monthly mortgage.*
With a cut in interest rates a near certainty this month, the Dow Jones Industrial Average skyrocketed to 27,000 for the first time ever. The Dow rallied this week on the testimony of Federal Reserve Chairman Jerome Powell. Powell’s statements prompted a surge for the S&P 500 which hit a high of 3,000 this week. The S&P 500 hit the 2,000 level mark five years ago.
The minutes from June’s Federal Open Market Committee meeting showed that, “Participants generally agreed that downside risks to the outlook for economic activity had risen materially since their May meeting, particularly those associated with ongoing trade negotiations and slowing economic growth abroad.”
That sentiment was not swayed by a strong jobs report released last week. In his testimony on Capitol Hill this week, Fed Chair Jerome Powell supported Wall Street’s view for the future. They expressed the desire to “act as appropriate” to sustain economic expansion.
“Since the June meeting and, even for a period before that, the data have continued to disappoint,” said Powell. Although the jobs report was the strongest since January, Powell argued that the rest of the data regarding the U.S. and world economies continues to be unimpressive. Of particular concern is the ongoing tariff conflict with China.
“Let’s go to trade: We have agreed to begin discussions again with China and while that’s a constructive step that doesn’t remove the uncertainty that we see as overall weighing on the outlook,” Powell said. “The bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook. And, in addition, inflation continues to be muted.”
Powell also told the Senate Banking Committee that the classic economic relationship between unemployment and inflation has collapsed. Typically, the trend has shown that when unemployment is low, like we are seeing now, inflation is high. That has not been the case at all in 2019. The Fed has now lowered its inflation target for 2019 from 1.8% growth to 1.5%.
“At the end of the day, there has to be a connection because low employment will drive wages up and ultimately higher wages will drive inflation, but we haven’t reached that point,” said Powell. “In many cases, that connection between the two is quote small these days.”
The Consumer Price Index data from the Bureau of Labor Statistics did show a strong increase in prices for consumers. The core CPI, which excludes food and energy, rose by 0.3% last month. That’s the largest increase for the core CPI since January of 2018. However, the overall CPI, offset by lower gasoline and food prices, rose by just 0.1%. It’s not expected that this data will affect the Fed’s decision on whether to ease rates.
The Producer Price Index (PPI) also saw a modest gain of 0.1% last month. The more telling year-over-year data shows that the PPI rose by just 1.7%. That’s the smallest gain since January of 2017. The underlying producer prices slowed down in June; yet another piece of data the Fed has been following to track our economy’s moderate inflation. Wholesale energy prices saw a big drop in June, slipping 3.1%. Goods prices decreased by 0.4% while a 5.0% drop in gas prices was the biggest contributor to the overall decrease in cost of goods in June.
REFI ELIGIBILITY SURGES AGAIN
With rates staying low and stable, the refinance market has continued to skyrocket. Last week we saw the Freddie Mac 30-year fixed-rate mortgage fall to its lowest level in three years. It is holding steady at that 3.75% average rate this week as well. You can see in this chart below from Freddie Mac, the stabilization of rates over the last couple of weeks. The blue line represents the 30-year fixed-rate mortgage average.
The most recent drop in low rates means more than 1.5 million people became refinance candidates. As of the end of June, more than 8 million people could benefit from a refinance, according to data from Black Knight.
When you look at the data from Black Knight, the average consumer could potentially lower their interest rate by 0.75%, which would save them around $266 per month.
The confidence for homebuyers, however, wavered last month. Fannie Mae’s Home Purchase Sentiment Survey for June showed people still aren’t convinced that right now is the best time to buy a house.
“Growing expectations that mortgage rates will remain steady suggest improved stability for housing affordability and helped keep the HPSI relatively flat this month, despite modest declines in other components,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. “Regional variations in housing optimism appear to be tied to a divergence in housing affordability; for example, home purchase sentiment is higher in the Midwest and South than in the West. And, to a lesser extent, the Northeast, where the lack of entry-level inventory and the resultant strong price appreciation has had a more profound impact on affordability. With fewer consumers expecting rates to jump back up – thereby creating less urgency to buy now – we expect housing market activity to remain stable.”