Lowering the Refinance Boom

Sure, people are taking advantage of falling rates. But don't expect this economy to turn on a dime.
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This year's boom in mortgage refinancing activity recently has gotten even bigger. But skeptics say that no matter how many homeowners take advantage of falling interest rates, it won't be enough to have a marked effect on the struggling economy.

Every time you turn on your computer these days, it seems you've got another unsolicited email recommending that you "Refinance Your Home While RATES ARE LOW!" and to "Let Your Home's Equity Work For You!" If you read on you'll find that

    Now You Can:
  • Pay off all your debts
  • Cut down your home's mortgage interest
  • Cut your current credit card payments
  • Lower your mortgage payment and Save Money

Thanks to 10 cuts from the

Federal Reserve

, this is advice that a lot of Americans are following already. The refinancing index that the Mortgage Bankers Association puts out remains near all-time highs and is nearly 20% higher than it was at the peak of the 1998-99 refinancing boom.

Refis Run Wild
Refinancing Index

Source: Mortgage Bankers Association

With the Fed expected to cut more still, and with the recent drop in long-term interest rates, the refinancing activity should stay steep for a while. Lower mortgage rates allow homeowners to shore up their balance sheets (as our friendly emailer has helpfully suggested), but many will spend at least some of the extra cash. Moreover, some will opt for "cash out" financing, where you increase the amount of your loan and raise cash but (because of the lower rate) keep the same monthly payments.

According to a study by the Federal Reserve, one-third of the homeowners who refinanced in 1998 and 1999 decided to take the cash-out route, raising $54.5 billion in the process. Given that refinancing activity is so much more furious now, it seems like we could see a lot of scratch hitting the economy.

The problem, says J.P. Morgan economist Jim Glassman, is that homeowners are generally not refinancing from very high rates. Part of this is because rates are not much below the old lows. And part of it is because, with increased automation (and that Internet thing), refinancing has become easier and cheaper. "We're refinancing at the drop of a hat," says Glassman. "When you refinance from a 6.5% to a 6% rate, you get very little bang out of it."

By contrast, explains Glassman, during the refinancing booms of the 1990s, "everyone was getting out of these high-rate mortgages." The average rate for a mortgage taken out in the 1980s was around 12.7%.

But Robert Barbera, chief economist at Hoenig & Co., says that the jump in refinancing may already be having a real effect on the economy -- if you know where to look for it. He points out that refinancing doesn't help the upper echelons of the economy so much as middle- and lower-income earners for whom the extra cash each month really matters. "They're the real beneficiaries of this refi boom," he says.

That doesn't help sales at Gucci, he says, but it should help retailers that focus on James Gatz instead of Jay Gatsby. And he notes that when retailers reported October sales on Thursday, lo and behold -- the high-end stores got stuffed while value-oriented outfits such as

Wal-Mart

,

Costco

and

Kohl's

continued to see growth. Obviously a part of that is that consumers of all stripes are eschewing high-cost items for more mundane fare.

But then again, a lot of the highfalutin' things rich people used to buy don't have a low-cost equivalent at Wal-Mart. Maybe Barbera's onto something.