7 minute read
1. Refinance Frenzy: Homeowners Rush to Lock in Lower Interest Rates
- Homeowners are rushing to refinance as mortgage rates hit a two-year low.
- While lower rates can increase disposable income and fuel a “wealth effect,” refinancing comes with upfront costs and risks.
What you need to know: According to Bloomberg1, mortgage refinance applications surged for the second week as Americans locked in the lowest borrowing costs in two years. For perspective, the Mortgage Bankers Association’s refinancing index jumped 20.3% in the week ending Sept. 20, reaching its highest point since April 2022.
Why it matters: The surge in mortgage refinance applications shows homeowners jumping on lower interest rates to cut monthly payments and free up cash. With borrowing costs at a two-year low, refinancing lets many lock in savings over the life of their mortgage. This refinancing wave not only potentially boosts consumer spending, but also signals growing confidence in the housing market and economy.
Now the Dunham Deep Dive: Many will welcome lower mortgage rates, which let them refinance at cheaper rates. But as always, it’s a double-edged sword.
On one hand, lower payments boost disposable income, giving households more money to save, spend, or pay down debt. More demand for housing can push prices higher, creating a “wealth effect” that boosts the economy, especially since housing is the biggest asset for most U.S. households (the entire bottom 90% of the country).
- The "wealth effect" is when people feel richer because the value of their assets - like homes or stocks - increases. Thus they tend to spend more money, boosting the economy, even if their actual cash in hand hasn't Essentially, when people feel wealthier, they are more likely to make purchases and investments which fuels growth.
But there’s a flip side…
- For example, if a homeowner refinances a $300,000 mortgage, they might lower their monthly payments by $150. But with upfront costs of $6,000 (a mere 2% of the loan amount), it would take about 40 months – or just over 3 years – to break even on those expenses.
Meanwhile, refinancing resets your loan term, often leading to more interest paid over time. And if home values drop, you might end up owing more than your house is worth, wiping out equity.
Just something to keep in mind.
Figure 1: Bloomberg, September 2024
2. Savings Rate Slump: What It Means for the Economy
- U.S. personal savings rate falls below 3%, raising concerns about consumer spending habits and financial vulnerabilities.
- Low savings boost consumer spending now but could signal a future economic slowdown as households try to rebuild savings.
What you need to know: The U.S. personal savings rate dropped below 3% in August - suggesting households are saving less and less and could be an issue.
Why it matters: A low savings rate indicates that consumers are spending more than they're saving, leaving them with a thinner financial cushion. This makes households more vulnerable to economic downturns, potentially leading to reduced spending, higher debt, and broader economic instability if recessionary pressures rise. In fact, Société Générale warns that U.S. consumers are flashing a recession signal, as the savings rate has slumped below 3% - a level seen before the 2008 financial crisis.
Now the Dunham Deep Dive: The U.S. personal savings rate measure is a relatively little-followed, but important, indicator of household budgets.
And as always, there’s a Good, Bad, and Ugly to this…
The Good: The low savings rate reflects strong consumer spending, which has helped support economic growth. More spending means businesses thrive, creating jobs and propping up the economy. So far, it’s been a big reason for economic resilience.
The Bad: The problem is that the savings rate is likely to rise again after dipping so low as we’ve seen throughout history. And when consumers shift their focus to rebuilding savings, they pull back on spending. Remember, as I’ve written to you about in the past, you can only do two things with the same dollar - spend or save. So, putting it plainly, a lower savings rate implies more consumption. But when it rises, it will imply less spending.
The Ugly: As mentioned above, when the rate climbs sharply, it tends to trigger a recession because every dollar saved is one not spent. In a consumption-driven economy like the U.S., this can hit GDP growth hard. If history repeats itself, the current low savings rate could prove unsustainable, and any spike in savings might signal the start of economic trouble. For instance, a sharply rising savings rate usually precedes periods of economic cooling - as seen before the Great Financial Crisis.
I’ll keep an eye on this trend.
Figure 2: St. Louis Federal Reserve, September 2024
3. Saudi Arabia Throws in the Towel on Price Control: The Battle for Market Share Heats Up
- Saudi Arabia's shift back to increasing oil production could drive prices lower, benefiting consumers but putting pressure on oil producers' profit margins.
- After losing market share to U.S. and other producers who took advantage of OPEC's output cuts, Saudi Arabia now faces a potential price war to regain its footing in the global oil market.
What you need to know: Oil prices have dipped as Saudi Arabia plans to ease its voluntary output cuts, boosting global supply to regain lost market share.
Why this matters: Saudi Arabia had targeted $100 per barrel to balance its budget but is now backing off. As per the Financial Times, they plan to increase production on December 1, after a two-month OPEC+ output pause. Falling oil prices can reduce costs for consumers and businesses, easing inflation. But they also lower revenues for oil-producing countries and industries, with potential ripple effects on global markets.
Now the Dunham Deep Dive: After two years of cutting production to raise oil prices, Saudi Arabia is now shifting its strategy to regain lost market share.
But this shouldn’t come as a surprise. In my December article, "The Perpetual Game: Saudi Arabia, OPEC, and Oil Markets Are Stuck in a Prisoner’s Dilemma," I hypothesized how OPEC’s production cuts gave U.S. and other oil producers a chance to ramp up their own supply. This not only allowed them to grab higher profit margins but also weakened OPEC’s hold on oil prices, nullifying the intended effect of the cuts, and creating internal tensions within the oil cartel.
- Simply put, when Saudi Arabia cut production to drive prices higher, other producers jumped at the opportunity. They ramped up their supply to take advantage of those higher prices and profits - leaving Saudi Arabia and OPEC to lose market share and essentially have their efforts undermined. It was like having their lunch money stolen constantly.
Now with crude oil prices down 25% since this time last year - falling well below the $100-per-barrel target - Saudi Arabia's plan to ramp up production could push prices even lower. This will mean cheaper energy for consumers but tighter profit margins for oil producers and strain on oil-rich nations' budgets. This could ignite a price war as producers battle for market share - just like in 2015-16 when oil prices plunged 70%, marking one of the steepest declines since WWII.
And if that’s the case – which I believe it is - the real question is: Who will emerge standing when the dust settles?
Time will tell.
Figure 3: TradingEconomics, September 2024
Anyway, who knows what will happen?
This is Just some food for thought as we watch how these trends develop.
As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.
Sources:
- US Mortgage Rates Fall Again, Triggering Big Wave of Refinancing - Bloomberg
- Pros and Cons of Refinancing Your Home - Experian
- Recession Outlook: Savings Has Dropped to 'Crisis Levels' - Business Insider
- FT. com
- What triggered the oil price plunge of 2014-2016 and why it failed to deliver an economic impetus in eight charts (worldbank.org)
Disclosures:
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