Consumers Feeling Pinch of Higher Interest Rates

[Jul 2, 2007.]

American consumers appear to be taking a hit as a result of the rise in interest rates. The yields on the 10-year Treasure note, which affect a number of long-term interest rates, have risen sharply recently. The fallout is expected to have an immediate effect on homeowners and prospective homebuyers alike.

For instance, homeowners who are attempting to refinance their adjustable rate mortgages are likely to feel the financial pinch. The average rate for a 30-year fixed-rate mortgage soared recently to 6.74 percent. Freddie Mac, a prime mortgage buyer, reports that the average was a scant 6.18 percent at the start of 2007.

In 2006, adjustable rate loans represented about one in four mortgage applications, a significant increase over 1998 totals. The number of adjustable rate loan applications was greatest in the year 2004.

But consumers are not the only ones feeling the effects of the interest rate surge. Businesses are seeing their expenses increase significantly as a result of the interest rate rise. As a result, corporations are not seeing the kind of profits they have in the past.

An economist for Bank of America, Mickey Levy, was quoted in a published report as saying, "There has been a half percentage point rise in rates while inflation has been flat, so the real cost of capital has gone up for consumers and for corporate America."

Foreign investors are also apparently selling stocks as a result of the interest rate increase amid fears of a rise in inflation. The Labor Department has reported that producer prices jumped 0.9 percent in May—a higher-than-expected increase.

But those with subprime mortgages are expected to be hardest-hit. That's because interest rates on adjustable-rate mortgages could be reset to double-digit levels. About $100 billion in such loans will be reset between June and October.

Julie Ann Amos
July 2nd 2007
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