Seldom do Alan Greenspan’s differences with investors show up so dramatically in the consumer market. At BankNewport last week, the rate for home-equity lines of credit was 4.75 percent; 15-year, zero-point, fixed-rate mortgages were at 5.25.
The gap at Credit Union Central Falls was a bit bigger: 4.25 percent vs. 5.125. Citizens Bank was at 4.25 percent and 5.00. Bank of America’s rates were up to 1.5 points apart, but only because its best deal for home-equity lines was a cut-rate 3.74 percent (for loans under $200,000, the rate was 4.24 percent).
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It’s an unusually flat market, and the cause is simple, analysts and bank officials say: Variable loan rates are tied to the Federal Reserve Bank’s prime rate, which has now been raised three times since June 30, to 4.75 percent. Mortgage rates are tied to the long-term Treasury security yields, which in turn are driven by the investment market.
At the Fed, the word on the economy is that it’s growing steadily, so rates have to go up to hold inflation in check. In the bond market, meanwhile, a more pessimistic view prevails, and lower interest rates are seen as key to maintaining economic activity.
The result is that as September wound down, the 10-year Treasury yield fell to 3.96 percent, the lowest since April 1, when prime was at 4.00. In late June, just before the Fed began raising rates, prime was 0.72 points below the Treasury yield. A year ago, both rates were about even, with Treasury notes fluctuating slightly higher.
For consumers who’d given up on getting a great mortgage deal amid all the news of rising rates, it was an unexpected second chance – and they seized it.
Mortgage applications increased by 4.6 percent from the week ending Sept. 17 to the week ending Sept. 24, the Mortgage Bankers Association reported. Applications were up 2.1 percent from the same period a year earlier. Purchases were up almost 18 percent from a year ago. And while refinancing activity had slowed in recent months, it rose 7.7 percent that week, to the highest level since April 21, the MBA said. Overall, refinancing accounted for 45.9 percent of total applications, up from 44.5 percent the previous week.
Not surprisingly, adjustable-rate mortgages lost some of their zing. The MBA reported that they made up 32.5 percent of applications, down from 33.1 percent.
“Adjustable rate mortgages had been really popular this year,” said Holden Lewis, senior reporter for Bankrate Inc., an industry Web site with a consumer focus. Now, Lewis added, “those ARM rates are still lower, and they’re still a better bet if you’re positive you’re going to move out of your house in three or five years. But the relative attractiveness of those loans has gone down.”
The MBA’s weekly rate survey showed the average rate for 30-year, fixed-rate mortgages was down to 5.64 percent, with 1.29 points, for loans of less than 80 percent of the property value; 15-year mortgages dropped to 4.99 percent with 1.30 points. The average rate on one-year ARMs, meanwhile, went up, to 3.92 percent with 1.13 points.
The outlook at individual banks varies. Both Citizens and Bank of America, for example, said refinancing activity was still down overall, but fixed-rate loans for new construction and home improvements were moving healthily.
At The Washington Trust Company, on the other hand, refinancing and debt consolidation were such a big part of the loan picture – 70 percent to 80 percent of the volume at the peak of activity, last year – that the decline in that sector has made a big dent, according to Philip L. Friend, senior vice president for retail lending.
Nationwide, Friend said, only about one in seven people with loans haven’t refinanced yet. “There’s been some who’ve come back to the plate for one reason or another, but most loans are for a different reason, like tuition or home improvements.”
As a result, Friend said, “there’s no question (activity) is way off pace from where it was.” For 2004 as a whole, volume will likely be 45 percent to 55 percent of last year’s. That said, 2003 was a record year, with loan costs at the lowest point since 1958.
But with oil prices so high and revised economic figures painting a more positive picture, will long-term interest rates begin to rise again? On Wednesday, revised gross domestic product figures pushed Treasury yields up just slightly, to 4.08 percent for 10-year notes. Views on the long-term outlook, however, vary widely.
Lynn Reaser, chief economist for Banc of America Capital Management, generally agrees with the Fed’s assessment: “I would say we’re still in a period of sizable growth,” she said in an interview. “And we should be coming out of the soft patch, which may have even been exaggerated in the first place.”
Reaser pointed to the new GDP figures, which show a 3.3-percent annualized growth rate, “a significant gain in economic activity.” The bond market has been “very bearish about the economy,” she said, and while some fear high oil prices could fuel inflation, fixed-income investors believe they “could dampen growth significantly.”
As Reaser sees it, the bond market’s view is “inconsistent with the kinds of gains we have seen and are likely to see going forward.” It’s hard to predict the outlook for the immediate future, she said, but “I think within the next two to three months, interest rates are more likely to be higher than lower. If the economy continues to show significant gains with gradual improvement in the job market, Treasury rates are likely to move off their current lows.”
A Bloomberg News survey of economists who predicted Treasury rates’ decline earlier this year, however, showed they expect the low rates to hold.
“There is no significant inflation threat and bond yields are going to fall,” Christopher Low, chief economist at FTN Financial in New York, told Bloomberg.
“This is an economy that needs the stimulus of relatively low interest rates to keep its momentum,” Avery Shenfeld, senior economist at CIBC World Markets Inc. in Toronto, told the financial news service.
Bankrate’s Lewis, who tracks a wide range of economic analyses, agrees.
“I think the long-term yields they may go up a little bit, but I don’t think they’re going up a lot,” Lewis said. “I just think this soft patch is lasting a lot longer than Alan Greenspan seems to think. He’s a lot smarter and more qualified than me, so I’m sticking my neck out saying that, but it doesn’t look that great to me.”
