Higher Loan Rates Starting to Stress Consumers
Today’s San Francisco Chronicle reports that Bay Area residents have been affected by the steady increase in mortgage rates, now at their highest points in over four years. Some have had to shelve plans to refinance, while others tap their savings and many more struggle to find any relief.
Like most of California, the Florida housing market has seen incredible growth since 2000, and as rates rise, the pressure on many consumers subsequently grows. While increased rates aren’t likely to bankrupt a lot of people, they make themselves felt, especially for those who need to borrow big for houses and more.
“It’s a modest but growing financial weight on most households. Homes and cars (bought with loans) are a lot less affordable than they were a couple, three years ago, reflected in the sharp decline in sales,” said Mark Zandi, Chief Economist at Moody’s Economy.com.
From June 2004 through last week, the Federal Reserve has implemented 17 consecutive one-quarter percentage point hikes in the federal funds rates, which now stands at 5.25 percent. Interest rates on many other kinds of short-term loans, such as adjustable-rate Florida home loans, are derived almost directly from the Fed funds rate.
But rates on longer-term loans - set by the market, not the central bank - are also on the rise. Thirty-year mortgages are at a four-year high point, averaging 6.68 percent for the month of June, according to Freddie Mac. The Fed raises interest rates to curtail inflation, such an important goal that Ben Bernanke and Co. are willing to cause some pain in pursuit of it.
“The policymakers’ intent is to take a little steam out of the economy by making life a little more difficult for everybody. The concern was that everyone was feeling too good and inflationary pressures were developing. That’s not good for the economy in the long run and not good for everyone. They want everyone to rein in (spending) a little bit. People don’t do that until they feel financial pain,” Zandi said.
For many people the pain isn’t too serious, at least for now. But it’s enough to prompt a little belt-tightening or other financial changes.
Some who have been making extra payments on 30-year mortgages in hopes of cutting several years off the term have decided Florida home loan refinancing makes more sense. A 15-year mortgage can conceivably shave tens of thousands in interest off the top before the loan hits maturity — but if rates continue to inch upward into the 7-8 percent range, this may not be within the realm of possibility for as many residents.
While no one is making any bets on the issue, many experts think the Fed is at or near the end of its rate-hike campaign. Moreover, Senior Economist Jared Bernstein, of the Economic Policy Institute in Washington, D.C., believes that the rate hikes, unpleasant as they may be, are an unlikely breaking point as far as pushing people into bankruptcy.
“Sure, if you’re teetering on the edge, higher loan repayments are the last thing you need, but usually it’s bigger, more cataclysmic events like a divorce, loss of a job, serious illness in the absence of insurance, that forces people into bankruptcy. This is more an impingement on living standards. It just makes it more difficult to get ahead,” he said.
Economists say higher Florida home loan rates will prompt some consumers to trim their budgets on discretionary items such as shopping ventures or eating out. Most people interviewed say they haven’t made significant cutbacks, and are covering extra costs in other ways. Most likely to feel the impact of the current market conditions are people with adjustable-rate mortgages, or consumers looking for a Florida home equity loan.
“A lot of the ARMs are starting to adjust. When those terms end and they need to be reset, mortgage rates are going to be a percent or two higher. You’re talking about a few hundred dollars per month and as much as $1,000 or $2,000 more per year. This, in a climate where family incomes have been flat relative to inflation and people are getting pinched at the pump. When you look at a few extra hundred dollars going out the door, that’s going to pinch,” Bernstein said.
