In the US zero interest repayments and low mortgages target spenders, writes Conor O'Clery, North America Editor
Flicking through the New York Daily News, I discover that if I want to buy a Kingsdown Royal Posture mattress on credit from Sleepy's chain stores I can skip the deposit and pay for it over a year at zero interest. Over the page, Diamond Vision is offering a similar deal - interest-free financing over two years for a laser job to cure my short sight on the never-never.
Should I want to move out of Manhattan, Meadow Run Builders has an advert for stone-faced four-bedroom houses with double garages in the Poconos at $179,900, (€156,326) with only $10,250 down and monthly repayments as low as $1,168 per month. And anyone with an old mortgage of 7-8 per cent can go to a company called BLS Funding (its website is actually called FastCash.com), which boasts it can refinance a property at rates going right down to 3.25 per cent.
Low and zero interest financing have become the norm in the weird twilight zone created by Federal Reserve chairman Mr Alan Greenspan's relentless rate cutting.
There is so much cheap money swilling around in the US economy that companies are even giving shoppers cash to buy their products through a "rebate" system. A friend bought a $1,500 Sony computer recently and was sent him a cheque for $100. In New York, if you buy a $99 mobile phone from Verizon they give you a second phone free and then send you a cheque for $50.
A teenage student gets $400 in cash from Ford Motors when buying a first car on hire purchase - with no down payment (although, on the downside, low interest rates means higher payments for accident cover, as insurance companies are earning less on their reserve funds). The big winners in this period of historically low interest rates - the nearest to 0 per cent for half a century - are home-owners and house-buyers.
The housing market was said to be on the point of collapse last year as prices soared out of proportion to incomes, but Mr Greenspan and his colleagues have, for now, soothed away the worries of buyers and sellers.
With the Fed still on a downward trajectory, mortgage companies and banks see little risk in taking on even more mortgage debt. Before this week's cut in short-term lending rates, the average rate for a 30-year mortgage was 5.3 per cent, nearly half what it was a couple of years ago. The mortgage industry giant Freddie Mac is this week offering 30-year fixed-rate mortgages at 5.21 per cent and 15-year fixed rate mortgages at 4.62 per cent, re-igniting a boom in refinancing.
Hardly any house-owner I know in New York and Washington has not re-mortgaged in the past two years, and some have done it twice. Last year according to the Federal Reserve, about 10 million mortgages were refinanced nationwide.
The new rates mean the prospect of further refinancing by home-owners who have not yet got in on the act. The Mortgage Bankers Association forecast last month that some $3 trillion will be lent on homes this year, up from $2.5 trillion last year.
But what do people do with the cash bonanza of a few thousand dollars or money saved by cutting monthly payments from $1,000 to $850?
"I'm letting my savings sit in the bank because I don't trust the stock market, even though I'm getting damn all interest," said a Manhattan business man who got badly stung when his tech stocks slumped in 2001.
Small-time investors are very nervous about re-entering the stock market.
A number of analysts are warning that the current Wall Street recovery is a bubble, as price-to-earnings ratios are still way too high. However, bank savings and money market accounts are paying hardly any interest, down to 1 per cent and less, which is hitting pensioners who rely on interest cheques to supplement their retirement incomes. They are going to get socked again.
Recently, the average seven-day yield on taxable money funds dropped to an all-time low of 0.67 per cent. Some people are just holding on to their cash savings.
Against that, the US just might be on the brink of deflation where prices spiral down in a vicious circle, and the banknotes kept under the (Kingsdown Royal Posture) mattress actually becomes more valuable. Moreover, stocks will do poorly if deflation is coming as it pushes down corporate profits.
The money home-owners get from refinancing is more likely to be used on house renovations to improve the value of the property, or to pay off crippling credit card debts. Mr Greenspan would prefer the latter so that consumers with no-longer-maxed-out credit cards can take advantage of zero interest deals and cash-back cheques and help the economy to grow a bit faster.
