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Retail Sales vs Consumer Confidence (2008-2010)

If consumer spending is a key to economic recovery, the nation is on its way.

Monday, the Census Bureau released national Retail Sales figures for October and, for the second straight month, the data surged past expectation. Last month’s retail figures jumped 1.2 percent — the largest monthly jump since March — as total sales receipts climbed to a 2-year high.

Consumer confidence is rising, too. Though still below the long-term trend, confidence in the future up-ticked in October.

The current confidence reading is now double the low-point from February 2009.

It’s no surprise that both Retail Sales and Consumer Confidence are higher. They correlate in a common-sense-type manner. When consumers are more confident in the economy, they’re more likely to spend their money. This, in turn, leads to more purchases and rising retail receipts.

Unfortunately, for home buyers and rate shoppers , it also leads to rising mortgage rates.

Because consumer spending accounts for two-thirds of the economy, spending growth leads to economic growth. But it’s been a lack of growth that’s kept mortgage rates this low.

When the growth starts, the low rates end. It’s why mortgage rates have added as much as 1/2 percent over the past 10 days. Consider the recent “good news”:

  • Retail Sales made a 2-year high in October
  • Existing and New Home Sales showed big improvement in September
  • Jobs growth returned in October

The days of 4 percent, 30-year fixed rate mortgages may be nearing its end.  If someone is thinking of buying and considers the impact of rising rates on his budget, it could help spur some offers from those sitting on the fence.

Retail Sales (September 2008 - August 2010)If rates stay low, two things can happen.  One, you give your end buyers more opportunity to purchase a home.  Two, it takes away the urgency to buy now, because there is less fear of rising rates.  Buyers know we are headed toward winter, and that they are in the driver’s seat,  so price the home properly.  Properly doesn’t mean – “I might get this for it, so I’ll try for a few weeks.”  Properly means the lowest price compared to  similar homes, or the best home compared to similarly priced houses.

Here is what happened to slow the rise in interest rates for homeowners:

The recent rise in mortgage rates was slowed this week after the government released its Retail Sales report for August.

Prior to Tuesday, mortgage rates had been spiking across New Hampshire on the resurgent hope for U.S. economic recovery. The sentiment shift was rooted in reports including the Pending Home Sales Index and Initial Jobless Claims, both of which showed surprising strength last week.

August’s Retail Sales, though, after removing motor vehicles, auto parts and gasoline sales, failed to maintain the momentum. Its figures were actually in-line with expectations — it’s just that expectations weren’t all that high.

Wall Street now wonders whether the weak Back-to-School shopping season will trend forward into the holidays.

The doubt spells good news for mortgage rates and home affordability.

Because Retail Sales is tied to consumer spending and consumer spending accounts for two-thirds of the economy, a weak reading tends to drag down stock markets and pump up bonds, and when bonds are in demand, mortgage rates fall.

This is exactly what happened Tuesday. The soft Retail Sales data eased stock markets down, and generated new demand for mortgage bonds. This demand caused bond prices to rise, which, in turn, caused mortgage rates to fall.

Mortgage rates did not cut new lows this week, but they’re very, very close.

With mortgage rates at historical lows, it’s an excellent time to look at a refinance, or gauge what financing a new home would cost. Low rates like this can’t last forever.