Interest rate fluctuations haven't weighed on consumers' minds for a long time.
The combination of a sluggish recovery from the Great Recession in 2009, low inflation and a lack of capital investment kept a lid on rates for almost a decade. But the economy is moving again. Businesses are investing more, people are finding jobs, and inflation is picking up, meaning higher interest rates for homebuyers, car buyers and other consumer borrowing.
The Federal Reserve has boosted its benchmark short-term rate, which affects short-term lending such as credit cards, four times over the past year and is expected to raise the benchmark at least two more times before the end of 2018. The 10-year U.S. Treasury yield, which affects mortgage and other long-term interest rates, hit 3 percent for the first time since 2014 on Tuesday and stayed comfortably above that milestone Wednesday.
And as rates rise, home buyers in Houston and across the nation will have to think harder about rates and where they can afford to buy a house.
"There is a head wind," said Robert Dye, chief economist at Comerica Bank in Dallas. "First time homebuyers are more vulnerable to higher rates. If you're scraping your last dollars together to get into a house, that can bump you out of that purchase."
In Houston, the 30-year fixed-rate mortgage averaged 4.6% in February, up from 4.29% in January, and the highest in five years, according to New York consumer financial services company Bankrate. The local average for mortgages is running a full percentage point higher than the Houston rate in March 2016, during the worst of the downturn in oil prices, which have a huge impact on Houston's energy-centric economy.
That's a big jump in mortgage rates, especially for first-time home buyers. If you're paying 3% on a $250,000 fixed-rate 30-year mortgage, your monthly payment comes to about $1,050. At 4%, it's almost $1,200 a month.
"That's material for many people," said Paul Murphy, chief executive of Cadence Bancorp in Houston. "Half a percentage point one way or the other determines whether they can afford a car or home. Others can find it very manageable, but it depends on the household. That's not zero money for anybody."
Average rates for a 60-month car loan in Houston are up about quarter point over the past year and a half-point from April 2015, according to Bankrate.
The good news for borrowers is the increases are coming on top of historically low rates. Interest rates are still far lower than they were before the Great Recession. In mid-2006, the yield on the 10-year Treasury was about 5% and mortgage rates were about 6%. But even small jumps can have a big impact on low-income households.
Long-term interest rates jumped about half a percentage point at the beginning of 2018 and then remained stagnant after February, until they starting picking up again over the past few weeks.
The Federal Reserve has raised short-term interest rates six times since December 2015 as a way to stay ahead of inflation as economic conditions improve. Those rates affect credit cards, home equity lines of credit and adjustable-rate mortgages.
Long-term interest rates are spiking because bond investors are reacting to inflation concerns, and because the Treasury plans to double its borrowings in 2018 after the passage of the GOP tax bill.
"That's putting upward pressure on yields," said Greg McBride, chief financial analyst at Bankrate. "Higher mortgage rates are further crimping affordability as home prices continue to climb amid a low inventory of homes for sale."
Average interest rates for 60-month auto loans in Houston increased to 4.79% in February, up from 4.3% the same time two years ago. But rate changes for those loans will be virtually imperceptible to borrowers, because even half a percentage point increase only amounts to a few bucks on a monthly payment on a short-term loan, McBride said.
Overall, Houston's economy is improving. U.S. crude prices, which play a prominent role in setting the pace of the region's economic growth, have climbed to almost $68 a barrel, up from $26 a barrel during the worst of the downturn in early 2016. The local economy appears to be headed for a year of above-average growth, Dye of Comerica Bank said.
"The shale drillers are profitable," Dye said. "This is a good zone for Texas."
Still, consumers are used to lower interest rates, and it's hard to determine how rising rates will affect the economy.
"We're transitioning from being used to something that's abnormal to getting used to more normalcy, in terms of Federal Reserve monetary policy," Dye said. "And that needs to be part of the decision making process on how they (consumers) fund big purchases."
