Along with 30-year fixed rates, the 15-year fixed and adjustable rates have also dropped significantly.
By Manuel Gutierrez, Consulting Economist to NKBA
Although the pandemic and subsequent economic turmoil have destroyed many businesses and caused havoc among consumers, at least one positive economic development has emerged.
As mortgage rates have dropped a significant one percentage point over the past year, the opportunity became available for homeowners to refinance their existing home mortgage loans. A $200,000 mortgage from a year ago would result in annual interest savings of $2,000 if refinanced today. Of course, the other side of the equation is the lender who, after the refinancing, will receive $2,000 less in interest income.
Last year’s drop in mortgage rates follows a more or less steady downward pattern over the last 30 to 40 years. Rates were at their highest in early 1980, when they reached nearly 17%, as seen in the smaller graph in Fig. 1.
Similar to the decline in the 30-year, fixed-rate mortgage, other interest rates have also fallen. As Fig. 2 shows, two other common types of loans used for home mortgages — the 15-year, fixed rate and the adjustable rate, which is the average of one-to-five year ARMs — are following the same pattern.
While the 15-year rate has fallen by approximately one percentage point over the last year, similar to the 30-year loan, the rate on ARMs has fallen less sharply, about two-thirds of a percentage point.
Along with the beneficial effect of declining mortgage rates for existing and potential homeowners, the pandemic has helped the financial situation of employed consumers, who are not spending as much travel, restaurants, entertainment and the like, resulting in greater savings.
In the last 20 years, between 2000 and 2019, consumers were saving an average of 6.1% of their disposable income. This year, that figure jumped to 17.2%, brought about by the sharp collapse in spending in the second and third quarters. The rate was more pronounced in the second quarter, when consumers were saving a remarkable 26% of their disposable income. The savings rate was still a strong 16.1% in Q3.
The changes in consumer habits have also brought about a sharp decline in credit card use. From the beginning of the year, when the balance on consumer credit card debt had reached $864 billion, consumers have paid down their card balances by $109 billion, reducing the outstanding balance to $755 billion (left panel on Fig. 3).
This is an unprecedented development. For more than a decade, the pattern by consumers was to use their credit cards for more purchases, and to allow the outstanding balance to increase year after year. Fig. 3 shows the continuous increase in credit card debt from $673 billion at the end of 2013, to the $864 billion at the beginning of this year — a 28% increase over six years.
Consumers’ delinquency rates on credit card loans have also improved. In July, the latest month for which data is available, the rate had dropped to just 2%. This is the lowest delinquency rate since 1991, when this data was first collected.
