March 9, 2021 – What is the definition of a “K-shaped” economic recovery?


Economic Commentary

What is the definition of a “K-shaped” economic recovery? A “V-shaped” is a quick and sharp recovery and a “U-shaped” recovery is more gradual. The “K-shaped” recovery is bifurcated. This means that certain segments of the recovery are happening at different speeds. In this case, the real estate sector definitely represents the rising part of the “K.” Other sectors are not so lucky.

Last week we saw a reading on a key sector – jobs. Last year the economy lost approximately 20 million jobs, but gained 10 million back as the economy recovered. The jobs recovery slowed as the year came to a close. How did we do in February? The economy added 379,000 jobs, which beat expectations. The previous month was also revised higher by over 100,000 jobs. Overall, the unemployment rate fell to 6.2% from 6.3%, though the labor participation rate continued to lag.

Right now, the jobs recovery represents the lower leg of the “K,” but this report contained hope that this leg may rise as well. If you would look at a stock market reaching record highs—stocks have already recovered. Interest rates have also been rising lately, indicating increased confidence that the economy is going to recover more rapidly. But as the data shows—we are still not firing on all cylinders. Remember, the markets move in anticipation of what we think is coming. Stocks and bonds are signaling a brighter future. Though these indicators are not always right, we hope they are this time around.

Weekly Interest Rate Overview

The Markets. Rates continued to rise last week, going over the 3.0% mark for the first time in several months. But the pace seems to be moderating. For the week ending March 4, Freddie Mac announced that 30-year fixed rates increased to 3.02% from 2.97% the week before. The average for 15-year loans remained at 2.34% and the average for five-year ARMs fell to 2.73%. A year ago, 30-year fixed rates averaged 3.29%, just about 0.25% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “Since reaching a low point in January, mortgage rates have risen by more than 30 basis points, and the impact on purchase demand has been noticeable. While purchase activity remains high, it has cooled off over the last few weeks and is currently on par with early March, prior to the pandemic. However, the rise in rates over the next couple of months is likely to be more muted in comparison to the last few weeks, and we expect a strong spring sales season.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Low mortgage rates, financial assistance from parents, and personal savings are helping first-time buyers stretch their housing budgets more than they thought they could, according to a survey from® of 1,000 prospective and recent first-time home buyers. More than two-thirds of survey respondents say they are surprised at what they can afford; 47% say their budget is larger than they thought it would be. “The dramatic decline of interest rates in 2020 was a pleasant surprise for many buyers,” says George Ratiu, senior economist at®. “Lower rates allowed many buyers to stretch and buy more expensive homes while keeping their monthly budget the same.” First-time buyers also are saving for a home faster than they expected. Half of recent first-time buyers surveyed say they were able to save for a home in less than three years by putting aside a portion of their paycheck each month, cutting out discretionary spending, and saving lump-sum payments like tax refunds. Also, many first-time buyers are getting help from their family: 52% of Americans who bought their first home in 2020 say they received down payment assistance from friends or family, most notably their parents. Source:®

More house hunters—particularly move-up buyers—are being drawn to new-home construction in the COVID-19 pandemic, so much so that it’s driving a surge in construction across the country. Single-family starts ended 2020 with the best year in home building since the Great Recession, and 11% higher than 2019. Ultra-low rates and a shift in housing preferences—including a growing demand for larger spaces, home offices, and outdoor amenities—are driving the increase, said Robert Dietz, chief economist of the National Association of Home Builders, at a press conference during the virtual 2021 International Builders’ Show. Dietz says new-home construction will likely grow by 5% during 2021 and hit above 1 million housing starts for the first time in years. But building can only go so far in meeting the surge in buyer demand since the pandemic, added David Berson, chief economist for Nationwide Mutual. Existing-home sale inventories have been at record lows as homeowners delay selling due to the pandemic. Berson said that as the COVID-19 vaccine becomes more available and the economy improves, he predicts that more homeowners—realizing the equity gains in their homes—will list their existing homes and that could help alleviate some housing shortages. Source: Realtor® Magazine

Those in the industry can sometimes talk about a rate hikes in apocalyptic terms. They’re sure it will come one day, and, when it does, it will get a whole lot harder as refinance volume disappears and the whole industry is left to live off the purchase market alone. To hear one economist say it, though, there’s not too much reason for fear. Odeta Kushi, deputy chief economist at First American, explained that, historically, the housing market has continuously risen during rising rate eras. She’s found that through recent long stretches of rising rates, such as the roughly two-decade period between 1980 and 2000, existing house prices have continued to rise and appreciate steadily. It’s her view that originators should greet rising rates as an opportunity, the sign of economic growth and a strong purchase market. “I know a lot of people were spooked in January with the 10-year treasury yield increasing and the 30-year fixed rate mortgage following suit,” Kushi said. “But in the past that has in no way meant a major decline in the housing market. We’ve found that it really depends on what caused the mortgage rates to rise in those different rising rate eras. We found that existing home sales have had the potential to continue to rise in those eras and, similarly, house prices are even more resilient, continuing to appreciate.” Source: Mortgage Professional America

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