With the recent decline in interest rates, could consumer spending get back on track? Consumer spending has been moderating of late and any rebound would be welcome, as it accounts for two-thirds of U.S. economy. Housing continues to be a large contributor to GDP, accounting for almost 20% through consumption spending on housing services and residential investment.
The 10-year Treasury recently broke 2.00% and yields are now at their lowest levels since 2016. That is only 50 bps higher than its low range set back in 2012-13 and 2016. The probability of the Federal Reserve cutting interest rates multiple times by year end has increased to almost 100%. Borrowers are now finding lower borrowing costs across many products. Low mortgage rates and a strong, but moderating labor force could persuade those on the sidelines to eventually help boost housing starts and sales later this year.
Refinancing opportunities may also be in the cards given the historical relationship with interest rates, as shown in the graph. The last mortgage refinance wave occurred during the second half of 2016 and homeowners that may have missed that refinance window or even purchased homes as recent as 2018 could see value in refinancing. According to Freddie Mac, the average 30-year fixed-rate mortgages now sits near 3.85%, down from its peak last year of just below 5.00%.
When looking at the maximum conforming loan limit set by Federal Housing Finance Agency (FHFA) which now stands at $484,350.00 for 2019. A homeowner that purchased a home last year at peak level when mortgage rates were near 5.00%, could potentially see their monthly payment reduced from $2,600.00 to $2,270.00 which amounts to a monthly savings of $330.00. Homeowners may also have opportunities to access built up equity or even remove private mortgage insurance (PMI) with the continued rise in home prices, freeing up another expense.
Households could use this opportunity to save more or to pay off debts. However, the typical borrower historically will spend more on things like new vehicles or home improvements. If even a small percentage of homeowners took advantage of lower borrowing costs, this could translate into an increase in consumer spending giving a meaningful economic boost to a late stage economy.