Low mortgage rates bring mixed blessing
WASHINGTON — The Federal Reserve’s plan to keep interest rates super-low for at least two more years is great news for mortgage refinancers and other borrowers.
For retirees and others who need interest income, it’s a threat.
Nor will low rates likely revive a depressed home market, energize a weak economy or reassure frightened consumers.
They’re also putting pressure on Americans’ pensions. The consulting firm Milliman Inc. said last week that 100 of the nation’s largest pension funds were $254 billion short of what they need to meet obligations to retirees July 31, up from a $186 billion shortfall at the end of June. Low interest rates were the main reason for the widening gap.
The sinking rates flow from the Fed’s federal funds rate, which the Fed has kept near zero since the depths of the financial crisis in December 2008. The funds rate is the rate banks charge each other for overnight loans. It indirectly affects rates for credit cards and some business loans.
Longer-term yields are determined by traders. These yields are also near record lows, driven down by investors seeking the safety of U.S. Treasurys.
The yield on the 10-year Treasury note, which influences long-term mortgage rates, set a record low of 2.03 percent after the Fed’s announcement Tuesday. Earlier in the day, the yield had been 2.34 percent. As recently as Friday, it was 2.56 percent.
The average rate on a 30-year fixed loan fell last week to a yearly low of 4.32 percent after the Fed’s announcement, Freddie Mac reported. The 30-year loan hit a record low of 4.17 percent in mid-November.
The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to a record low of 3.5 percent, down from 3.54 percent the week before.
Mortgage brokers say refinancers are rushing to lock in those rates. In Greenwich, Conn., Tuck Bradford of Mortgage Master says his office is so swamped he’s extending the lock-in period that guarantees rates from 45 to 90 days so there’s time to process the volume.
Applications to refinance jumped nearly 22 percent the week before last, the Mortgage Bankers Association said. Refinancing made up more than 75 percent of mortgage applications, it said.
But tantalizing mortgage rates aren’t luring many buyers into a broken housing market. Even as refinancing soars, home purchase applications have barely budged.
Potential buyers have plenty of reason to stay on the sidelines. Many can’t buy because the home they live in is worth less than the mortgage they owe on it. Or they can’t sell their house.
In Cincinnati, Jeff and Jo Ann Hawkins slashed the price on their home by $100,000 in the course of a year. They got zero offers. Same for Danielle DeGrazia in Bethel, Conn.
Low rates are also squeezing retirees who typically keep most of their savings in safe but low-yielding certificates of deposit money market accounts.
Typically, investors would be advised at age 65 to keep at least 60 percent of their money in such safe investments. Investing in stocks could expose them to losses, if they had to withdraw their money before the market had time to recover. Older investors are commonly advised to have 70 percent or more in fixed-income investments.
Top-yielding one-year CDs are paying an average of just 1.2 percent. Five-year certificates are topping out at 2.4 percent. Inflation is running at an annual rate of about 3.6 percent, so these instruments won’t even keep up with the cost of living.
The Fed might have made it impossible for many retirees to rely just on interest-bearing accounts.
“The Fed’s pledge illustrates the peril of being 100 percent conservative in your investments,” says Greg McBride, a senior financial analyst at Bankrate.com. “Your entire income stream is hitched to the Fed’s wagon, and it won’t be moving for two years.”