Will Consumer Spending Increase as Mortgage Rates Continue to Fall?
The Federal Reserve continued to hold interest rates steady for the seventh straight consecutive time since June of 2006, remaining unchanged at 5.25%. The Fed’s decision means that the prime interest rate that commercial banks charge consumers for credit cards, home equity lines of credit, and other loans will remain steady as well.
While the Fed acknowledged that economic growth has slowed due to an increase in gas prices, a weaker dollar overseas, and a slump in the housing market, it remained bullish on economic expansion for the upcoming quarter. Even though the overall housing sector continued to suffer - primarily due to the sub-prime mortgage fallout - mortgage loan applications were up from the same time a year earlier, according to the Mortgage Bankers Association.
The national average interest rate on a 30-year fixed mortgage was lower from 6.76% a year ago compared to this week’s rate of 6.38% (Source: Informa Research Services). However, new home buyers are still finding it hard to qualify for a loan at today’s market prices. This gradual cooling of the housing market has resulted in a surplus of inventory and a decline in the number of new home sales, according to a recent report issued by the Lusk Center for Real Estate at USC.
Existing homeowners, faced with increasingly higher Adjustable Rate Mortgages are looking to refinance to lower fixed-interest rate loans. Lured by low-introductory teaser rates, nearly 41% of all variable sub-prime loans are scheduled to reset to a higher amount this year (Source: Center for Responsible Lending.) Borrowers who default on their loans could be faced with the threat of foreclosure causing consumer spending to become stagnant.
While slowing economic growth and curbing inflation is one of the main jobs of the Fed, it remains to be seen if the forces driving the real estate market will help or hinder consumer spending. Many economists believe that by not lowering interest rates in the near term may steer the economy towards a recession causing consumer prices to rise even further.
Source: Informa Research Services