The Federal Reserve's plan to keep interest rates super-low for at least two more years is great news for mortgage refinancers and other borrowers.
For retirees and others who need interest income? Not so great.
Nor will low rates likely revive a depressed home market, energize a weak economy or reassure frightened consumers.
No matter how low rates stay, nervous individuals and wary businesses remain reluctant to spend money or take risks. The economy is barely growing, unemployment is stuck at a recession-level 9.1 percent, the stock market is falling and the risks of another downturn appear to be rising.
"It's all about consumer psychology right now," says Stan Humphries, chief economist at Zillow.com. "During economic turmoil, people hunker down."
Wall Street is still trying to assess the Fed's unprecedented decision Tuesday to leave short-term rates near zero until mid-2013 because it thinks the economy will stay weak until then. On Wednesday, the Dow Jones industrial average plunged about 520 points, one a day after gyrating wildly and finishing up 4 percent after the Fed's statement.
The Fed's two-year timetable swept away any doubts about rates remaining low for the long run. Previously, it had said only that it would keep rates at record lows for "an extended period."
"Any information that provides some certainty is good for the economy and good for people who are trying to think longer-term about investments," says Frank Nothaft, chief economist at mortgage giant Freddie Mac.
The Fed sets a target for the federal funds rate. That's the rate banks charge each other for overnight loans. The Fed has kept that rate near zero since the depths of the financial crisis in December 2008. The funds rate indirectly affects rates for credit cards and some business loans.
Longer-term yields are determined by traders. These yields are also near record lows, driven down by investors seeking the safety of U.S. Treasurys. The yield on the 10-year Treasury note, which influences long-term mortgage rates, set a record low of 2.03 percent after the Fed's announcement.
The average rate on a 30-year fixed loan fell last week to a yearly low of 4.39 percent and likely dropped further this week after the Fed acted.
The low rates are having an impact — at least for people looking to refinance.
Mortgage brokers say refinancers are rushing to lock in those rates. In Greenwich, Conn., Tuck Bradford of Mortgage Master says his office is so swamped he's extending the lock-in period that guarantees rates from 45 to 90 days so there's time to process the volume.
Applications to refinance jumped nearly 22 percent last week from the week before, the Mortgage Bankers Association said. Refinancing made up more than 75 percent of mortgage applications, it said.
But tantalizing mortgage rates aren't luring many buyers into a broken housing market. Even as refinancings are soaring, home purchase applications have barely budged.
Potential buyers have plenty of reason to stay on the sidelines. Many can't buy because the home they live in is worth less than the mortgage they owe on it. Or they can't sell their house.
Since peaking in 2006, prices across the country have plunged nearly 24 percent to a median $169,200. They're down 4 percent since the Great Recession officially ended more than two years ago.
"This is the real problem in this country today," says Nancy Walsh, a Realtor with The Masiello Group in Nashua, N.H. "People have mortgages, and their house values keep dropping. They keep lowering the price, and they can't get out. And now they look and see their retirement funds are getting wiped out, too."
In Cincinnati, Jeff and Jo Ann Hawkins slashed the price on their home by $100,000 in the course of a year. They got zero offers. Same for Danielle DeGrazia in Bethel, Conn.
Some would-be homebuyers whose creditworthiness was damaged during the recession are unemployed or fearful about their jobs.
"Consumer confidence is the biggest issue," says Dave Goff, a managing broker for Carpenter Realtors in Carmel, Ind. "People don't want to get into a 30-year mortgage if they're not sure they'll have a job in six months."
Low rates are also squeezing retirees who typically keep most of their savings in safe but low-yielding certificates of deposit, money market funds or Treasurys.
Typically, investors would be advised at age 65 to keep at least 60 percent of their money in such safe investments. Investing in stocks could expose them to losses, if they had to withdraw their money before the market had time to recover. Older investors are commonly advised to have 70 percent or more in fixed-income investments.
Top-yielding 1-year CDs are paying an average of just 1.2 percent. Longer-term 5-year certificates are topping out at 2.4 percent. Inflation is running at an annual rate of about 3.6 percent, so these instruments won't even keep up with the cost of living.
Those meager returns are forcing some retirees to take on more risk. Carol Clemens, 65, of Edmond, Okla., has given up super-safe fixed-income investments. She's putting more of her retirement savings in stocks of companies that pay dividends yielding at least 4 percent.
"That security is difficult for people to give up, but when you have no choices you have to take calculated risks," she says. "That's what it's forcing a lot of retired people to do."
The Fed might have made it impossible for many retirees to rely just on interest-bearing accounts.
"The Fed's pledge illustrates the peril of being 100 percent conservative in your investments," says Greg McBride, a senior financial analyst at Bankrate.com. "Your entire income stream is hitched to the Fed's wagon, and it won't be moving for two years."
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