CLIP Index update: January 2014
By one measure, interest rate conditions got slightly better for consumers in January. Unfortunately though, those conditions still favor banks over their customers, and the slight improvement may have been for all the wrong reasons.
The improvement could be seen in a narrowing of the gap between mortgage rates and CD rates, which MoneyRates.com measures in its CLIP Index. That narrowing will mean cheaper mortgages for some, but that victory may come at a price.
CLIP Index shrinks but remains high
The CLIP Index shrunk from to 4.37 percent in January, down from 4.40 percent in December. This happened as a result of a 3 basis point drop in 30-year mortgage rates, while CD rates remained unchanged.
Since the spread between mortgage rates and CD rates measures how much more banks earn from their customers in loan interest than deposit customers earn from bank interest, the narrowing of this gap is a positive for consumers. However, banks are still getting the better of the relationship, because the CLIP rate is still unusually high from a historical perspective.
At 4.37 percent, the current CLIP Index is among the top 20 percent all time, and well above the historical average of 2.84 percent. One year ago, the CLIP rate was at 3.35 percent, so it has increased by slightly more than a full percentage point in the past year. This is entirely due to an increase in mortgage rates, since short-term CD rates have remained unchanged at 0.06 percent over the past year.
Why mortgage rates dropped
That trend toward higher mortgage rates reversed in January, despite a recent change in Federal Reserve monetary policy that was expected to send mortgage rates higher. In December the Fed announced that it was scaling back its quantitative easing program by $10 billion in monthly bond purchases. In January, the Fed trimmed another $10 billion from that program.
Since these bond purchases had been instrumental in driving mortgage rates down to record lows, many believed that unwinding that program would lead to higher mortgage rates. However, while the Fed was acting on the assumption that the economy was getting stronger, the financial markets seemed to see things differently.
Responding to a string of negative economic reports -- including weaker hiring, slower new home sales and a diminished outlook for manufacturing -- the stock market struggled during January, and bond yields declined. Since bond yields are a form of long-term interest rate, they have an influence on mortgage rates, so those declined during the month as well.
Winners and losers in January
It remains to be seen whether the Fed is right about the economy's strength or the markets are right about its weakness. For now though, the situation represents a mixed bag for consumers, with some winners and some losers:
- Home buyers win, as mortgage rates reverse their 2013 climb and start to ease.
- Depositors lose, as a weak economy keeps short-term CD rates, along with savings account rates and money market rates, mired near zero.
- Current home owners get a mixed result, because while lower mortgage rates may create refinancing opportunities, a weaker economy could dampen property values.
As much as borrowers may enjoy lower interest rates, if those rates are falling because the economy is weakening, that ultimately would create more losers than winners.
About the CLIP Index
The Consumer Lost Interest Percentage (CLIP) Index measures how much interest consumers are currently losing in the gap between mortgage and deposit rates. To create this index, MoneyRates.com compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.
It makes sense that mortgage rates exceed the interest rates paid on short-term deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.
This graph represents the arc of the CLIP Index, measured in annual averages, from 1971 to 2013:
MoneyRates.com updates the CLIP Index every month to gauge what kind of deal banks are offering their customers. This gives consumers an opportunity to better understand today's banking landscape -- and how to get the most from it.