Rates continue to slip lower on stalled economy
July 30th, 2010With key economic data released this week no signs appear that mortgage rates will begin to climb in the near future. Mortgage rates drop and stay low when the economy slows or shows no growth, as in our current economic climate. If you are using free on-line mortgage calculators to run the numbers for a mortgage refinance or purchase of a new home the information below can assist in your decision.
Consumers aren’t confident
America’s economy is driven by consumers purchasing goods and services. Consumer spending makes up around 70 percent of our economy. When consumers are not confident in their economic future they do not spend their earnings. This lack of spending slows the economy. So it was not good news for economic recovery when the Conference Board reported July’s consumer confidence index dropped to 50.4. This drop in July consumer confidence followed a steep drop in the index in June. Concerned about business conditions and the continuing soft labor market, consumers have a pessimistic outlook for their own economic condition.
Poor consumer confidence is not good news for retailers this summer, nor other sectors of the economy. However, if you are using a refinance calculator to determine your savings in monthly mortgage payments, you CAN feel somewhat confident that current low mortgage rates will remain low for the near future based on this data.
What is the ‘Beige Book?’
The Federal Reserve Bank publishes a report on current economic conditions around the country and it is called the “Beige Book.” Using anecdotal economic evidence from around the Reserve Bank’s districts the report shows how various sectors and regions are doing economically. While not the basis for Fed policy on interest rates the Beige Book shows the sentiment and attitudes towards the economy from the different Federal Reserve districts. The recent Beige Book shows stalled or slower growth throughout the country and little indications from any of the districts that the economy is growing.
After the release of the Beige Book John Williams, head of economic research for the San Francisco Fed, said in regards to the slow economic activity, “Although discouraging, the recent softness in the economic data looks much more like a bump in the road of what we already thought would be a gradual recovery, rather than a swerve into a ditch.” Some bump. Enough of a bump that the Fed members have lately commented more on what can be done to revive the economy, lower rates, than to control the economy, higher rates.
Prequalification calculators will allow you to forecast your purchasing power assuming continued low mortgage rates based on the Fed report and comments.
Rates and apps drop
Two key weekly reports this week moved in the same direction, down. Every week the Mortgage Bankers Association (MBA) releases its Weekly Applications Survey and Freddie Mac releases its Primary Mortgage Market Survey on interest rates. For the week ending July 23 the MBA reported that the total application index dropped 4.4 percent from the prior week, led by a decline in refinance applications of 5.9 percent despite rates continuing to creep lower. The purchase application index for the week increased 2.0 percent, the highest the purchase index has been since late June. Applications for ARMs compose almost 6 percent of the total applications taken during the week.
Following the MBA release Freddie Mac released its reports on interest rates for the week ending July 29 that showed rates dropped incrementally from the week before to 4.54 percent at a cost of 0.7 origination points. Mortgage rates in the Freddie Mac survey have been under 5 percent for the past twelve weeks. Feel secure in using a rate under 5 percent for most of your mortgage calculator calculations.
As we move into August and the last month of summer vacations the economy needs two key sectors to pick up if economic growth and recovery will restart by the fall. First is consumer spending and confidence. Lack of consumer spending restricts economic growth. Concerns about job loss and the labor markets keeps dollars in families’ bank accounts and not retailers’ cash registers. This leads to less job hiring and increased concerns about the job markets. Second is the housing industry finding firm footing on sales of existing homes. A home sale generates significant economic activity. If existing home sales can pick up without the existence of outside incentives like tax credits the result will be a strong signal to the average consumer.
In the meantime look for interest rates to remain low through August absent some sudden shift in the economy. Use mortgage calculators to determine your monthly savings through mortgage refinancing or your purchasing power to buy a new home.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.
