Personal Finance Blog By MoneyRates
November 29, 2013
After rising by 19 basis points during November, current mortgage rates are nearly a full percentage point higher than they were in early May. The question is: Have higher mortgage rates begun to take their toll on the housing and refinance markets?
Indications are that despite some outward signs of strain, those markets are still quite healthy.
Housing prices march onward and upward
On November 26, the latest S&P/Case-Shiller Home Price Indices revealed that home prices rose by 3.2 percent during the third quarter, and by 0.7 percent during September. On the surface, these figures seemed to represent a slowing down from the 7.1 percent growth rate for the second quarter, and the 1.3 percent growth rate for August.
However, the real estate market is notoriously seasonal, and when seasonally adjusted figures are compared, it turns out that the second- and third-quarter growth rates are virtually identical, as are the August and September rates.
The third quarter figure is especially telling, since this year's rise in mortgage rates essentially occurred in May and June. This means that significantly higher rates prevailed throughout the third quarter, but the housing market continued its recovery anyway.
Refinancing down -- but not out
Of course, higher mortgage rates also mean higher refinance rates. Does this mean that the window for refinancing has closed?
According to figures from the Mortgage Bankers Association, there has been some erosion of refinancing activity since refinance rates moved higher. From early May to late November, the refinance share of overall mortgage application activity declined from 76 percent to 64 percent.
Still, the fact that nearly two-thirds of mortgage applications are still for refinances suggests that fairly strong demand has survived the rise in refinance rates. This may be partially because the continued rise in housing prices is still bringing loans out from under water. This creates refinancing opportunities for the first time for people who bought their properties near the peak of the housing boom, when mortgage rates were much higher than they are today.
Also, some refinancing activity will survive higher rates because there are reasons for refinancing, such as restructuring payments, other than simply lowering the interest rate.
The big picture
The resiliency of housing prices and refinancing activity makes sense when you consider two big-picture realities. One is that mortgage rates have risen in large part because of renewed strength in the economy. That strength -- while still far from overwhelming -- is also likely to create new buying demand to mitigate the impact of higher mortgage rates.
The other big-picture reality is that current mortgage rates are still very low from an historical standpoint, even if they have risen somewhat sharply this year. That means housing is still relatively affordable to new buyers, and refinance rates are still attractive to some current mortgage holders. So for now, the housing market has largely withstood the impact of higher mortgage rates.
November 15, 2013
It seemed as though the narrative for 2013's economy had already been written: Signs of promise in the first half of the year were choked off by fiscal dysfunction in Washington. Last week though, two pieces of economic news suggested there might still be time for another chapter to the story in 2013 -- a chapter that reads less like it was written by Stephen King.
Notes for cautious optimism
Last week, the Bureau of Economic Analysis announced that Gross Domestic Product grew at a real annual rate of 2.8 percent in the third quarter. That's a somewhat middling pace, but it represents the third consecutive quarterly improvement in GDP. The economy has had such a chronic problem with sustaining momentum that the last time GDP improved for three consecutive quarters was in 2003.
Also last week, the Bureau of Labor Statistics announced the creation of 204,000 new jobs in October. That beats the average for the prior 12 months, and means that job creation has now topped 200,000 jobs in two out of the last three months.
Any optimism about these figures should be tempered by the fact that they are still more like isolated data points than part of a sustained trend. However, isolated or not, these data points are surprisingly positive.
What comes next
A big concern for the economy has been what will happen when the next showdowns on the budget and the debt ceiling occur, which will happen in early 2014. That still threatens to be disruptive, but in light of recent economic news, one factor may take on even more importance than usual: holiday shopping.
Holiday shopping is always important economically, as it is central to the profitability of retailers. This year though, the special significance is that it will take place in the shadow of those looming fiscal showdowns. Recent GDP and employment numbers suggest that businesses and consumers might just be showing enough strength to shake off the efforts of politicians to disrupt the economy. An especially strong holiday shopping season might confirm that notion -- especially if it is backed up by continued strength in the employment numbers. These will be the key stories to watch as the rest of 2013 plays out.
Impact on interest rates
If the economy really is gaining momentum, expect interest rates on savings accounts and mortgages to follow the same drill they followed earlier this year. Mortgage rates should rise first, as lenders act to protect their long-term revenue streams. Savings accounts and other deposits will follow more cautiously, once bankers are convinced it is worthwhile to pay more to attract deposits.
That leaves 2013's story ending with something of a cliff-hanger. Current mortgage rates are already higher than they began the year, but savings account rates haven't budged. Will the economic momentum last long enough for savings accounts to benefit? That chapter won't be written until 2014.
November 1, 2013
There hasn't been much inflation in recent years, but there's still been enough to eat away at the purchasing power of savings accounts. That trend continued with the latest release of the Consumer Price Index (CPI), which showed that prices increased at a seasonally adjusted rate of 0.2 percent in September, bringing the inflation rate for the past year to 1.2 percent.
Lowering the inflation hurdle
Inflation is the hurdle that savers and investors have to get over before they can start really making money -- or more accurately, start gaining purchasing power. Normally, you can expect that inflation hurdle to be around 3 or 4 percent, but over the past year that hurdle has been much lower.
In one of the economic releases that was delayed by the government shutdown, the Bureau of Labor Statistics put out the September CPI report on October 30. Though the gain of 0.2 percent was mild, it was a tick up from August's 0.1 percent.
Energy was the chief culprit in pushing prices higher, as this segment of the CPI increased by 0.8 percent during September. In contrast though, energy prices have actually declined by 3.1 percent for the one-year period, which has been an important influence in keeping inflation moderate. Furthermore, there is reason to believe that energy will continue to have a dampening effect on inflation when October's figures are released, as oil prices declined through most of the month.
A symptom of a weak economy
Even though the inflation hurdle has been particularly low over the past year, savings accounts have still failed to clear it. While the inflation rate stands at 1.2 percent, savings accounts are yielding an average of just 0.06 percent. Money market rates are not much better, and even five-year CDs are failing to beat inflation, with an average yield of just 0.75 percent.
The underlying problem is that those nice low inflation rates are a symptom of a weak economy. Demand is so weak that companies lack pricing power, which results in low inflation. That same lack of pricing power discourages companies from expanding and hiring, which in turn further weakens the economy.
Like low prices, low bank rates are also a product of weak demand. In a lackluster lending environment, banks don't have a particularly great demand for capital. Meanwhile, they've had no trouble attracting deposits, even at minimal interest rates. So, awash in deposits they have little productive use for, banks don't have a strong incentive to raise their interest rates.
Thus, even low inflation is hard for savings accounts to beat. While you may not beat inflation, you can take a much bigger dent out of it if you shop around for the most competitive bank rates. Unless weak demand drives inflation even lower, or until stronger demand pushes bank rates higher, taking a bigger dent out of inflation may be the most you can ask for.
October 16, 2013
More than two weeks into the federal government shutdown, and just hours before the deadline to raise the debt ceiling, signs that the budget crisis was affecting the everyday economy were becoming more apparent. One example was a sharp slowdown in purchase applications for mortgages -- and that could be just the beginning of the damage the fiscal dispute does to the housing market.
A dampening effect on mortgage applications
Despite the fact that current mortgage rates seemed to have stabilized after rising earlier this year, purchase mortgage application activity fell by 5 percent during the second week of October, according to the Mortgage Bankers Association (MBA). There are a number of reasons to suspect that the government shutdown contributed to this decline:
- The furloughing of a large block of government workers takes some potential demand out of all phases of the economy -- including the housing market.
- Uncertainty over the outcome of the budget dispute has made the public pessimistic -- and pessimistic people don't tend to make long-term commitments like buying houses.
- Some federal mortgage programs have been shut down or at least slowed by furloughs and funding cut-offs. Tellingly, the MBA reports that purchase applications in government mortgage programs fell by 7 percent during the same week that purchase application activity generally slowed by 5 percent.
Of course, application activity is just on the leading edge of the purchase process, so the impact of this slowdown on prices will become more apparent in the weeks and months ahead. Any reversal of housing prices could become a vicious cycle: As home values dip below mortgage balances, fewer people can take advantage of still-low refinance rates. Some of those who can't refinance may wind up in foreclosure, putting still more pressure on housing prices.
Woes may be just beginning
A slowing of purchase activity may be just the beginning of the housing market's woes. Forget about an actual default on U.S. debt obligations -- just the serious talk of a default may be enough to damage the country's credibility as a borrower. Credit concerns send interest rates higher, and anything that affects rates on U.S. debt tends to affect most interest rates in the U.S.
Current mortgage rates may seem stable, but the credit concerns this crisis has raised could send them higher. If the U.S. actually defaults, that increase in rates could come swiftly. If default is averted but budget squabbles continue to push government finances from one crisis to another, expect a slower but steady increase in mortgage rates over time.
From Federal Reserve intervention in mortgage-backed securities to special federal assistance for distressed home owners, the government has taken extraordinary steps in recent years to pull the housing market out of a tailspin. Over the last year it looked as though these measures had succeeded. However, it may prove that with one misadventure over the budget, the government has undone all the constructive work it had accomplished.
October 4, 2013
One of the dangerous things about the fiscal confrontations taking place in Washington is that depending on where you live and what you do, you might not immediately notice the shutdown of the federal government or the effects of a debt default. However, those actions could ultimately have severe impacts that last well beyond when an agreement is reached to resolve the immediate disputes.
One area likely to be impacted is interest rates. Whether you are a bank depositor wishing savings accounts could get a little ahead of inflation, or a home owner hoping to see attractive refinance rates in the future, Washington's brinksmanship may destroy those aspirations.
Potential effects of the shutdown
From savings accounts to refinance rates, here are some plausible effects of the current federal government curtailment, and of a possible default on U.S. government debt obligations.
- The shutdown is a further drag on economic growth. Some 800,000 government employees have been sent home, which is more jobs than the economy created in the last four months combined. In short, this shutdown could stop whatever momentum the economy has dead in its tracks. If this happens, depositors may have to live with near-zero interest on their savings accounts for a while longer. Homeowners may see the value of their properties start heading south again, which could prevent refinancing even if refinance rates are attractive.
- A default would shake up lender confidence. One thing that could send interest rates soaring despite a slow economy is if the confrontation in Washington goes to the next step of forcing a default on U.S. debt obligations by not raising the federal debt ceiling. For decades, U.S. Treasuries have been considered the most risk-free long-term investments available, because Uncle Sam was considered the most reliable borrower. If confidence in that borrower is shaken, lenders will demand more interest in the future. Rising U.S. Treasuries yields would force a host of other interest rates to rise along with them. Under this scenario, savings accounts could see higher interest rates, but at the cost of severe economic disruption.
- A compromised dollar would lead to inflation. Part of that disruption could be soaring inflation. The U.S. dollar has long been the world's reserve currency of choice, and the trading currency for major commodities, such as oil, around the world. However, if the financial backing of the dollar is called into question, demand for the dollar will suffer. This drop in demand would likely cause the value of the dollar to fall relative to other currencies, causing prices to rise. Inflation hurts borrowers and lenders alike, which is probably a hint to where the fiscal confrontation is heading -- everyone ending up a loser.
Given the amount of tough-guy posturing that has become a part of the budget confrontation, it seems as though some of the players fancy themselves as gunslingers facing off at high noon. The only problem is, this is the kind of unpredictable shoot-out in which innocent people tend to get hurt.