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Builders, consumers feel rate rise

By Christopher S. Rugaber
AP Economics Writer

WASHINGTON — All it took was speculation that the Federal Reserve could slow its bond buying months from now and then a few words from Chairman Ben Bernanke to confirm it.

The result is that record-low interest rates that have fueled economic growth, cheered the stock market and shrunk mortgage rates, but punished savers, are headed up. And once the Fed starts scaling back its bond purchases, those trends could accelerate.

It means home loans are starting to cost more. Corporations will pay more to borrow. Bond investors are being squeezed. The stock market is plunging.

The yield on the 10-year Treasury note, a benchmark for long-term mortgage rates and other loans, hit 2.43 percent Thursday. As recently as May 3, it was 1.63 percent.

For now, mortgage rates remain extremely low by historical standards. Economists say rates might not rise much further unless the economy strengthens significantly.

And the fact that Bernanke and the Fed say the economy is healthier represents a critical dose of confidence. Slightly higher rates may spook stock and bond traders. But in the long run, a robust economy should sustain the housing rebound, support job growth and encourage businesses to borrow, even at somewhat higher rates.

The Fed’s $85 billion a month in bond purchases have helped keep long-term rates down. Bernanke said he expects the Fed to stop buying bonds by the middle of 2014 if it feels the economy can manage without that stimulus. He stressed, though, that if the economy weakens, the Fed won’t hesitate to step up its bond purchases again.

Here’s how higher rates will affect consumers, businesses and other players.

Consumers

The main effect on consumers probably will be higher mortgage rates. Rates on auto loans, student loans and credit cards probably won’t rise much. They’re more closely tied to the short-term rate the Fed controls. That rate isn’t expected to rise before 2015.

The average rate on a 30-year mortgage increased from a record low of 3.31 percent in November to 3.98 percent the week of June 14, according to mortgage giant Freddie Mac. That’s the highest point in more than a year.

Mortgage applications fell 3.3 percent last week, according to the Mortgage Bankers Association, though they’re still up from their level a year ago.

But economists say the housing recovery can withstand higher rates. At an annualized rate, sales of previously occupied homes topped 5 million in May for the first time in 3½ years.

Steady job gains and solid consumer confidence should fuel sales in coming months, even if rates are higher.

“It’s that improving economy that’s bringing people back into the housing market,” said Greg McBride, senior financial analyst at Bankrate.com. “The recent rise in mortgage rates does not negate that.”

The biggest barrier for many homebuyers has been difficulty obtaining a mortgage. Banks have tightened lending standards since the financial crisis erupted in 2008. Higher loan rates would let banks make more from mortgage lending and could lead them to lend more freely.

“The irony is that higher rates are likely to mean more people can get mortgages,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

Homebuilders

Higher mortgage rates could lower demand for new homes. That would squeeze builders.

The stocks of leading builders such as Toll Brothers, Lennar and D.R. Horton all plunged Thursday far more than the stock market as a whole.

But many builders say they remain optimistic. They say higher rates will encourage potential buyers to get into the market before rates rise further.

“We’re trying to encourage buyers to get off the fence, so we think it will actually help sales,” said Holly Haener, director of sales and marketing at CBH Homes in Meridian, Ohio.

Eventually, if mortgage rates keep increasing, some buyers no longer would be able to afford a home, Haener acknowledged. They might have to buy a smaller house or forgo some home amenities to offset the cost of a higher mortgage rate.

Small businesses

Higher rates could further depress loan demand at many small businesses, at least in the short run.

But higher rates also can benefit small business because they signal that the economy is strengthening. Once companies make more money because they have more customers, they’re more inclined to expand or buy equipment even though financing is costlier.

Government deficit

The federal government — the nation’s biggest borrower, with a $17 trillion debt — might have the most to lose from higher rates. The super-low rates of the past few years have given the government a break on the interest it pays on the federal debt at a time when the annual deficit was soaring.

After four years of $1 trillion-plus deficits, the nonpartisan Congressional Budget Office has forecast that the deficit will shrink to $642 billion this year. That would be down from $1.09 trillion in the 2012 budget year.

The CBO factored higher rates into its forecasts. But some economists say it might not have anticipated how high rates might go. The 10-year Treasury averaged 1.8 percent last year. The CBO expects it to average 2.1 percent this year, 2.7 percent in 2014 and keep rising to 4 percent by 2018.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said those projections now look low. Still, Sohn said, other trends could offset the rate rise.

“On balance,” he said, “a stronger economy generating more tax revenue will be far more beneficial than the higher cost of debt.”

Last year, the government paid $220 billion in payments on the publicly held part of its debt. The CBO predicts that figure will be slightly higher this year but will more than double by 2018.

AP business writers Bernard Condon and Joyce M. Rosenberg in New York, Alex Veiga in Los Angeles and Martin Crutsinger in Washington also contributed to this report.

Copyright 2019 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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