The new year might have started off under a cloud of uncertainty as lawmakers scrambled to avert the fiscal cliff, but experts forecast 2013 to be an improving year for the economy and consumers’ finances.
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“The markets and banks don’t like uncertainty and now that part of the fiscal cliff has been cleared and decided with legislation, consumers can expect more credit and more certainty in the economy,” says credit card expert Beverly Harzog.
The latest rounds of housing data hint the housing market is finally on a path of recovery after bursting five years ago.
“I think that most people are expecting good things from housing this year…the drivers of the housing market like low interest rates and low inventory levels which is good news. The national market is healthier than last year and will only improve,” says Patrick Newport, a U.S. economist and IHS Global Insight.
The labor market is still far away from creating the 250,000 jobs a month it takes to make significant reductions in the unemployment rate, but recent Labor Department reports have shown an improvement. “The job market is a tough one to call,” says Bankrate.com senior financial analyst Greg McBride. “If we still have a slow growth economy it is hard to see how the labor market will shoot the lights out, but I expect an uptick in job growth this year, it might not be the consistent addition of north of 250,000 jobs each month, but it will improve.”
Income, Spending and Saving
Experts anticipate consumers’ payrolls to hold steady throughout the year and the expiring reduction in Social Security payroll taxes as part of the fiscal cliff legislation means we'll be paying 2% more — which lowers household budgets.
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“We have a slow-growth environment with very modest pay increases,” explains McBride. “If you adjust for inflation, it’s another year with flat incomes for a lot of people." He adds 2013 will be “another lousy year for savers” since he doesn’t expect banks to increase interest rates on savings accounts.
McBride expects inflation to hold steady for the year, but says there could be a surprise to the upside.
“I am not sure if it will come this year, but there is a definite risk inflation could climb to the 2% to 2.5% neighborhood if energy prices spike or we face another drought that pushes food prices up.”
He continues to say the Fed’s “easy money policy” will ultimately lead to inflation in the next five years.
Banks tend to increase fees and lower interest rates on savings accounts during tough economic times, according to Harzog, who expects more credit and better credit card offers in 2013.
“The further we get away from unpredictably, the better the credit market. When you have a situation when you don’t know the economic policies, future taxes and health care changes, that makes the markets skittish and banks and credit issuers don’t want to give out credit during uncertain times. All that is behind us and consumers stand to benefit.”
Offers. Harzog expects consumers to see better credit card offers with low interest rates and balance transfer offers and warns people not to be too quick to throw away promotional mail. “We will see better sign-up offers, and people with strong credit scores can expect to see some extraordinary offers come in the mail, so these people should be sure to read these offers and not just rely on online promotions.”
Digital Credit. Mobile wallets will also become more prevalent this year, but don’t expect plastic to go extinct any time soon. “It’s going to be a slow transition,” says Harzog. “It’s still easy for consumers to whip out a credit card and it’s cool to use your smartphone, but people aren’t sold on the security just yet.”
The Federal Reserve’s monetary policy to keep interest rates at record low levels helped spur the housing market’s recovery, and the central bank pledged to keep rates low until the unemployment rate falls to 6.5%.
“There is every reason for the housing market to only get better this year and through 2014,” says Newport. “Interest rates are still low and the number of homes on market is at a seven-year low and we are not building enough to replace that rate which will bring housing prices up and also improve consumer spending.”
Mortgage Rates. Experts don’t expect mortgage interest rates to creep much higher this year, continuing the buyer’s market through 2013. McBride at Bankrate expects rates to trend a little higher with the 30-year fixed rate to stay between 3.5% and 4% with Newport expecting rates to be at 3.4% at the end of the year.
Home Prices. Home levels will remain low this year, but will increase as the year progresses. “Prices aren’t going to drop any further, we have housing prices going up 2.5% in 2013, it’s a good time to buy if you can.”
Refinancing Activity. Low interest rates spurred a flurry of refinancing activity through 2012, but the pace has slowed in recent months and will continue to unless federal policy changes to expand eligibility.
“The pool of people eligible for refinance have already done it,” Newport said. “The pool is just not very big so we won’t see a big pick up in refinancing unless the eligibility requirements are changed to include people who are [underwater] on their mortgages.”
Newport points out that while refinancing doesn’t help repair the housing market, it keeps more money in consumers’ pockets and leads to more spending—a necessary part of a strong economy.