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Markets & Stocks
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Bye bye refi
The surge in mortgage-refinancing has kept the economy going. What happens when it goes away?
November 8, 2002: 6:09 PM EST
By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The mortgage-refinancing boom has been pure manna for an economy that's had very little going for it. Too bad it might not be around much longer.

The power of the refi in helping tide over the U.S. economy has been praised by everyone from Fed Chairman Alan Greenspan to Pimco bond guru Bill Gross. Even as businesses have become increasingly cautious, cutting capital spending and slashing hiring plans to the quick, the drop in mortgage rates has allowed householders to stay in the game.

As long-term rates began their dip toward 40-year lows this summer, mortgage-refinancing activity started to take on a frenzied pace. From the end of the second quarter to the end of the third, the Mortgage Bankers Association index of mortgage refinancing activity more than doubled. Even with some recent moderation in refi activity, it's 600 percent above where it was two years ago.

That translates into a big boost in spending power: With householders paying lower rates on their mortgages, they have more discretionary spending or, in the case of a cash-out, money up front.

But more and more it looks like long-term rates, and hence mortgages, have put in their low for the year. Wednesday's half-point cut in the fed funds rate helped bring down yields in the Treasury market, but the yield on the 10-year Treasury, at 3.86 percent, was still a stretch away from the 3.57 percent it hit on Oct. 9. The average rate on a 30-year mortgage this week was 6.11 percent, according to the Freddie Mac, above early October's 5.98 percent.

One last dance

That may mean we're heading for a last huzzah when it comes to mortgage refinancing activity, according to Lehman Brothers chief economist Ethan Harris. He reckons that many householders procrastinated on refinancing (until recently, Harris was one of them) and will now conclude that this is the last chance.

The Struggling Economy
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The Fed cut that saved Christmas?
The Fed's deflation dread
Hays: Don't rule out more Fed cuts
Does it still make sense to refi?

But it's after this last wave that things really begin to look bleak.

"After that, there's not much positive about the outlook," said Deutsche Bank chief U.S. economist Carey Leahey. "There are no job gains, and wages aren't rising at the moment."

So if the economy is truly going to recover without mishap, businesses will have to pick up the slack. Ever since the economy first ran into trouble, we've been treated to a game of chicken, where consumers have kept up their rate of spending, and companies have conversely avoided laying out cash. It's gone on for longer than most people thought possible, but one way or another, the game will have to end.

The Fed hopes that Wednesday's rate cut will do the trick. By cutting by a half point, rather than the quarter point the market expected, and then suggesting that it won't be taking rates lower anytime soon, it was trying to prompt businesses to not wait around for lower rates but start spending now.

"You have to convince the guy who's going to hire people and the guy who's going to buy capital equipment that the scenery is better," said Salomon Smith Barney economist Mitchell Held. "So far, that hasn't happened yet."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.