Rising Interest Rates Cutting a Lifeline for Consumers

Climbing interest rates are putting the squeeze on the mortgage refi market. Applications to refinance home mortgages fell 5% last week, dropping to an 18-year low.

According to CNBC, mortgage application volume was nearly 27% lower than a year ago when rates were lower. The refinance share of total mortgage application volume fell to its lowest level since August 2008, at just 35.3%.

As Peter Schiff pointed out in a recent podcast, this is a bad sign for the broader economy. With rising rates, US consumers will no longer have the option of using their house as an ATM.

One of the reasons that the inability to refinance your mortgage is going to become a problem is that refis have really been providing a lifeline to consumers to enable them to continue to spend.”

When you refinance your mortgage, it generally reduces your monthly payment. This means more money in your pocket to spend. You can also use mortgage refinancing to take cash out of the equity in your home – kind of like an ATM. You can then spend that money on home improvements, a new car, a vacation or whatever you want.

With interest rates pushed down and held artificially low by central bank monetary policy, home refinancing has helped fuel consumer spending over the past decade. But now the Federal Reserve has pivoted to tightening. In other words, it’s turned off the easy-money spigot.

If interest rates have now risen to the point where that option is no longer on the table, it’s like the lifeline is gone. And now, if you’re a consumer and you’re kind of tapped out, there is no relief. There is no way to get extra money by reducing your mortgage payment, or by taking some cash out of your ATM that we otherwise know as your house. And so, if more and more homeowners are denied that lifeline, well that is going to be a problem for the bubble economy.”

Consumers can’t keep spending if they can no longer free up spendable income by refinancing mortgages. Peter said this is going to be a bigger and bigger problem for the economy.

We’re at an 18-year low, I mean, pretty soon we’re going to be at an all-time record low because pretty soon rates are going to be so high relative to where everybody is that nobody is going to refinance. In fact, there are going to be a lot of people who are stuck in their home. They’re not going to be able to trade up into another home because the mortgage is unaffordable.”

Of course, a decrease in consumer spending is not good news in an economy driven by consumer spending.

And there are other signs of trouble. Total household debt hit a record $13 trillion in 2017, eclipsing levels seen on the eve of the Great Recession. And as we reported yesterday, sub-prime credit card delinquency rates have risen above levels seen during the financial crisis. These are all signs of a stressed American consumer.

Peter also covers some other economic news and discusses populism in both Italy and the US in his most recent podcast. Give it a listen.

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