The decline in the cost of money is nicer if you're the borrower

The Outlook

January 11, 1998|By William Patalon III

THE DROP in long-term interest rates -- as evidenced by record low yields on the benchmark 30-year bond -- is having an impact for consumers: Mortgage rates are falling, for instance. But not everyone is benefiting. Home loans are cheaper, but those on fixed incomes are now getting lower returns on their investments. Who are the winners and losers when rates fall?

Harold Evensky

Principal, Evensky, Katz & Levett, a Miami financial consulting firm

In fixed income, the losers are going to be the people who have fixed-income investments who have not diversified their holdings such as someone who invests in one-year CDs and rolls them over each year. They are clearly going to be the loser. The winners are going to be those who have diversified into long-term bonds.

There will also be a huge rush to refinance. The winner there is going to be the end consumer, the mortgage-holder who refinances. The loser is going to be the one who loaned the money and has to find a new place to reinvest it at a much lower rate.

Robert Sweet

Chief economist, Allied Investment Advisors

It's already having an impact if you look at new home sales. Consumers are feeling pretty good: Unemployment is low and the stock market is high, at least, was high. Consumer confidence is up. Lower interest rates have been an influence.

My own concern is that rates are not going to stay low beyond the end of next year. Unemployment is just too low. Something that I'm a believer in is that there is an inflationary point of unemployment. I used to think it was over 5 percent, but I'm beginning to think it's a little bit lower -- maybe 4.7 percent. Employers are going to have to pay up [and the higher wages will nudge up inflation].

Keith Gumbinger

Vice president, HSH Associates, a New Jersey financial survey and publishing firm

The winners certainly are those invested in long-term financial instruments. We also know the winners are the mortgage brokers.

Certainly, over the last year, the fall in long-term interest rates has been startling. And during the last eight weeks, the drop in interest rates has been great. Yields are down and mortgage rates have followed. The average 30-year fixed now is at 7.08 percent, making this the second-best time in years to refinance. People are certainly taking advantage of it. In October 1993, it was 6.83 percent for the same 30-year fixed.

Certainly not all types of credit have benefited. Credit card rates haven't budged and remain at 16, 17 or 18 percent.

Nancy Swain

Principal, Swain Hicks Financial Group, a Pittsford, N.Y., financial planning firm

While there really has been an impact on interest rates, our style or objectives haven't changed at all. We know the news from the Far East is affecting [active] traders, but I don't see that it is having a significant impact on small investors, especially those who are more conservative.

In terms of mortgage rates, it is having a good impact for people. I'm even considering refinancing my own mortgage.

Investors on fixed incomes, I think, have already dealt with this. It really would have affected people who were accustomed to getting 10 percent -- double-digit yields on their bonds or CDs or money-market accounts. When rates fell down around 5 percent, those investors felt it. But they've become accustomed to the lower yields -- though they're obviously not happy about it. It's been more than five years since we could get that kind of yield. Those people have come to the realization that if they're still after 10 percent yields, they're not going to get it with any degree of safety.

Thomas P. Walpole

CPA and financial adviser, Rochester, N.Y.

A lot of people are looking to refinance. With bond rates low, adjustable rate mortgages are also low. A lot of banks have low rates. One bank here is under 7 percent with no closing costs. I have one client in the process right now. Her mortgage is $300,000 and it's at 12 percent. That 5 percent savings means she's saving $15,000 a year. Now you're talking real money.

People on fixed incomes will be hurt a little bit, if you look at what their costs of living are. Doctors aren't going to cut their rates just because bond yields went down.

Tony Sagami

President, principal,, Austin, Texas

Retirees and people on fixed incomes are finding that what they always thought of as safe investments -- CDs, T-bills and short-term bonds -- are not as safe as they thought.

Their incomes have increased only 50, 60 or 70 percent over the last 15 years. We're talking about a harsh cut in their standard of living. They've lost a lot of purchasing power.

Pub Date: 1/11/98

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