- THE MAGAZINE
To be sure, some Americans who could have refinanced this time around will line up to lower their borrowing costs the next time the economy stumbles and the Federal Reserve cuts interest rates to rekindle activity.
But several massive waves of refinancing over the last two-and-a-half years as the Fed cut rates to their lowest level in over four decades have left a huge portion of outstanding mortgages at exceedingly low levels.
Consider that back in 2000, when the average 30-year home loan was at 8.05 percent, less than 1 percent of new 30-year U.S. home loans being generated were under 6 percent.
With 30-year loans at about 5.83 percent so far this year, over 75 percent of new 30-year loans are sub-6 percent, a huge shift that speaks volumes about how much has changed since economic growth turned sluggish nearly three years ago.
What's more, developments of the last month have brought rates to their lowest levels since the days of President Dwight Eisenhower and, according to mortgage market sources, have made about 90 percent of existing U.S. mortgage debt refinancable.
All this means that after all the refinancing of the last few years is history, far fewer Americans will be interested in refinancing because they'll already be set with 30-year home loans with super low rates.
"To get them to borrow aggressively again, fixed mortgage rates have to go much lower," said Mark Zandi, chief economist at Economy.com.
Theoretically, 30-year rates would have to slide below 3 percent from the current 5.3 percent, though some economists argue that a rate drop of 1 point might be enough to spur sizable refinancing activities to lift the economy.
Refinancing has pumped billions of dollars into a U.S. economy that has been sputtering since even before the Bush-Gore U.S. presidential election controversy in late 2000.
Enticed by the low rates, homeowners have rushed to switch into a mortgage with a lower rate, or to take out a bigger loan by borrowing against rising home values -- a transaction known as "cash-out" refinancing. In either case, homeowners have more cash to spend on big-ticket items or to cut household debt.
"You are getting access to cash. That's a big plus for the consumers," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities.
Fed Chairman Alan Greenspan has touted the benefits reaped from the three-year refinancing boom and, according to a Reuters poll of economists, refinancing could contribute anywhere from nearly a sixth to nearly a third of U.S. economic growth this year.
A study Zandi conducted at Economy.com concluded that since 2000, 20 percent of U.S. economic growth is traceable to refinancing.
But because so many homeowners already have loans with low rates, the current crutch is likely to be hard to reconstruct.
Thus the Fed could have one less favorable condition to rely on when it scripts monetary moves to stimulate economic growth the next time it falters, economists said.
Even if rates stay at these historical lows, homeowners already have less incentive for cash-out refinancings or taking out a home equity loan because home prices are now rising at a slower -- though still healthy -- pace.
"It'll be more difficult to call on home equity in the future to get out of rough economic spots," Zandi said.
The more profound point is that while low rates have been good to homeowners and to the economy over the last three years, they tell a tale of a weak economy, which is in no one's interest over the longer term.
In other words, rates falling again in the future to their current levels or to levels low enough to entice homeowners to refinance yet again would be exceedingly bad economic news.
"You need to pass the baton," said Deutsche Bank's Leahey. "You don't want to have another refinancing wave. You rather have a stronger economy and job growth."