Sag in Interest Rates Spurs Refinancing, Bond Booms
With long-term interest rates hitting their lowest levels in years, consumers and corporations are hurrying to take advantage, with homeowners rushing to refinance mortgages and businesses scrambling to issue new bonds.
Consumer refinancing volume has almost tripled since April as many homeowners swap adjustable-rate loans for the stability of fixed rates. Businesses, led by giants International Business Machines Corp. and McDonald’s Corp., issued an estimated $3.1 billion in bonds on Tuesday alone and a wave of more offerings is expected.
The activity is expected to intensify in coming weeks as the effect of falling bond yields continues to spread. Long-term bond yields usually determine rates on a variety of consumer loans.
“I’ve learned that it [refinancing] is an easy way to save money,” said Steven Weinberg, a veterinarian who said he is planning to refinance his house in Venice for the fourth time since he bought it in August 1994.
By boosting such key industries as real estate, lower rates are likely to help the U.S. economy in general and California’s in particular. That is expected to offset some of the negative effects of the Asian financial crisis.
Lower rates are “certainly a plus for the economy,” said Gary Schlossberg, an economist at Wells Capital Management in San Francisco. “The upfront effect is to improve corporate and household finances, which gives them greater wherewithal to increase spending.”
The downside is that not all consumers will benefit evenly. While rates on home mortgages and some auto loans have come down recently, people with credit-card, home equity and personal debt aren’t expected to see much, if any, improvement.
And for the stock market--which has been buffeted lately by worries about the impact of the deepening Asian crisis--lower rates are a mixed blessing. Lower rates help stocks because a reduction in borrowing costs improves corporate earnings. But a strong bond market coming at a time of shakiness in stocks might coax some investors to sell stocks to buy bonds. Though rates are falling, investors also are willing to buy bonds in part because many expect rates to fall even lower and they want to lock in current payment levels. Indeed, stocks fell on Tuesday partly for those reasons.
The fall in long-term rates since May has been dramatic. In April, the yield on the benchmark 30-year Treasury bond peaked just shy of 7.2%. But by Monday, its yield had fallen to 5.73%, its lowest level since the government began regular sales of those bonds in 1977. The yield fell further to 5.71% on Tuesday.
The genesis of the lower rates stems from anticipation of a slowing economy and reduced fear of inflation. Federal Reserve Chairman Alan Greenspan even suggested over the weekend that deflation, or falling prices for many goods and services, could occur.
For consumers, lower bond yields are showing up most clearly in mortgage rates.
The rate on a 30-year, fixed-rate mortgage has dipped to 6.73% from 6.87% two weeks ago, according to Mortgage News Co. Since April, the number of refinancing applications has almost tripled, said Susan Sterne, an economist at Economic Analysis Associates in Greenwich, Conn., citing Federal Reserve figures.
At Home of Savings of America, refinancing activity has doubled in the last six months and is still growing, said Howard Ackerman, a senior vice president.
“Based on the first couple of days this year, it seems like the trend is going to continue,” Ackerman said.
Lower mortgage rates prompted Los Angeles lawyer Jonathan Biddle to refinance the Santa Barbara vacation home he bought slightly more than two years ago. The monthly payments on his $600,000 loan, which now has a fixed rate of 7.625%, are down more than $500 a month from what he was paying on his previous, adjustable-rate mortgage, he said.
And if mortgage rates decline further, Biddle said, “We may do it again.”
“It looks like bond rates are falling and the mortgage rates will keep going down, too,” he said.
The money he is saving in mortgage interest “gives us greater leverage to do other things . . . It’s nice.”
Weinberg, the Venice veterinarian, said he can refinance for the fourth time because he is getting a so-called “no-fee” loan. Instead of paying specified fees, he will have a slightly higher-than-market interest rate. That means he has little reason not to refinance again if it means he can shave the cost of his monthly mortgage payments, he said.
“I’m experienced at it,” he said. “Why not go with the flow of interest rates and refinance just as if you were buying or selling stock?”
But it’s unclear whether the latest refinancing boom will equal the craze of 1993, when the 30-year mortgage rate bottomed at 6.56% in October. Many homeowners took advantage of those rates and may not be drawn in today unless they plunge far lower. Indeed, refinancing activity remains less than half of what it was at its peak in September 1993, Sterne said.
Several homeowners who refinanced in the early 1990s say they don’t need to repeat the process.
Among them is Canoga Park resident Lynn Assad, whose 30-year mortgage is fixed at 7.25%.
“We refinanced our house a few years ago at a very low interest rate and we’ll probably never have to do it again,” she said.
Barry Wanger, a Boston-area public relations executive, refinanced his home three times in the early-to-mid 1990s and is now the envy of his friends with a 6.8%, 30-year mortgage.
“I’m watching it,” he said of the mortgage market. “But it’s hard for me to envision it going down that much more. If it goes down to 6%, I’ll look at it again. Certainly, a few years ago, we were watching every day.”
Lower rates also have helped home buyers who now are able to afford first homes or can buy larger houses than they otherwise would have.
Consumers with other types of debt aren’t as lucky. Some auto-loan rates have drifted down in recent months. Though loans through banks have remained around 9%, loans through car dealers have slid to roughly 6% to 7% from 8% to 9% early in 1997, Sterne said. However, that’s been caused more because dealers are anxious to unload cars than because of the slide in market rates, she said.
For some auto dealers, special interest-rate deals have been successful in drawing customers. Robert Gottas, sales manager for Valencia Pontiac and Buick, said an offer of 0.98% financing over 24 months on new Buicks, an incentive that ended Monday night, ignited consumer interest.
“We had a lot of last-minute rushes just like a day-after-Christmas sale,” Gottas said.
With auto dealers increasingly holding down sticker prices in an effort to curb haggling, interest rates are a key incentive, he said. “On some of these cars there’s only $700 profit, so there’s not much room for negotiating there.”
Falling bond rates aren’t helping credit-card holders, where rates have increased to an average 15.8% from 15.1% in the first quarter of last year, Sterne said.
With personal bankruptcies mounting, card issuers have stepped back from their strategies of giving cards to virtually anyone who wanted them and have little incentive to tempt new customers with low rates, experts say.
A record 1.3 million Americans filed for bankruptcy last year, credit card company Visa USA said Tuesday. Last month, the Consumer Federation of America blamed aggressive marketing of credit cards for driving up consumer debt. The group estimated that 55 million to 60 million households had average credit card debt topping $7,000 and more than $1,000 in annual interest and fees.
Rates for home-equity and personal loans also haven’t come down much in recent months, Sterne said. Home-equity rates could ease somewhat in coming months if the Fed cuts short-term interest rates, prompting banks to slash their prime rates, which is what they charge their best business customers and what many of them use to set home-equity loan rates.
Indeed, even as long-term interest rates have fallen, short-term rates have remained level since March 1997, because the Federal Reserve--which controls short rates--has viewed the economy as too strong to justify lower borrowing costs.
“For the consumer, it comes down to who is able to refinance at lower rates,” Sterne said. The decline in bond rates “does not readily help people with credit cards or home-equity loans.”
Lower rates also are unwelcome news to savers who rely on fixed payments from bonds and certificates of deposit at banks for living expenses.
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