Personal Finance Blog By MoneyRates - November 2013
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.