Mortgage Rate Salvation
In a 10/6/2008 blog I commented that certain policy actions, such as one focused on lowering mortgage rates, would go a long way toward catalyzing the housing sector. I also mentioned in that blog, and in one earlier this week, that other demand side incentives (e.g. tax credits; capital gains tax abatements; etc.) could be effective in getting buyers off the sidelines and ultimately slowing, stopping, then reversing the decline in home prices (in lieu of the definitive solution—allowing the market to clear itself). In the not-too-distant future, I believe we're going to see the first evidence of at least one of those suppositions.
As a result of the Fed's latest moves, including its quantitative easing efforts, 30-year mortgage rates have pulled back substantially—to levels near or below 5%. Should we get a drop of an additional 50 to 100 basis points, I think we'll begin to see the first signs of an economic recovery. Notwithstanding the positive impact of lower rates on prospective home buyers, it will be of even greater and more immediate consequence to the refi market. Once the refi train gets rolling, millions of homeowners will have thousands of extra dollars (each year) in their pockets. One should not underestimate the benefit this will be to the currently stagnating/declining consumer side of the economy (which happens to comprise 70% of GDP).
Consumers, revitalized by lower mortgage payments and sharply declining gasoline prices, coupled with properly incented prospective home buyers, can go a long way toward putting our sputtering economy back on the tracks. If mortgage rates continue to decline, I'm much more bullish on the prospects of a 2nd half 2009 upturn.
As a result of the Fed's latest moves, including its quantitative easing efforts, 30-year mortgage rates have pulled back substantially—to levels near or below 5%. Should we get a drop of an additional 50 to 100 basis points, I think we'll begin to see the first signs of an economic recovery. Notwithstanding the positive impact of lower rates on prospective home buyers, it will be of even greater and more immediate consequence to the refi market. Once the refi train gets rolling, millions of homeowners will have thousands of extra dollars (each year) in their pockets. One should not underestimate the benefit this will be to the currently stagnating/declining consumer side of the economy (which happens to comprise 70% of GDP).
Consumers, revitalized by lower mortgage payments and sharply declining gasoline prices, coupled with properly incented prospective home buyers, can go a long way toward putting our sputtering economy back on the tracks. If mortgage rates continue to decline, I'm much more bullish on the prospects of a 2nd half 2009 upturn.
ya know, Chuck... I often wonder whether the answer to most of society's overwhelming debt obligation is access to more debt thru mortgages. What's wrong with renting until you feel comfortable enough to buy?
My concern with all of these low cost mortgage deals is that mostly only those who could get mortgages today are already served. That's great! But what does that solve but a society on more debt?
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I don't think many disagree that mortgage qualification standards became absurdly lax over the last 5+ years. The current, more rigid requirements are a return to normalcy and rationality.
It should be noted though that the anticipated refi boom I discuss in the post likely does not increase debt, rather it restructures it, makes it more manageable, and in many instances, reduces it.
As you intimate, U.S. consumers often overextend themselves with debt; however, one should distinguish between bad, consumption-oriented debt (e.g. credit card balances), and debt that has wealth-building properties (e.g. equity in a home). The latter, if managed properly, is a credible way to achieve security over the long term.
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I think you are right again oh wise one!! But let me give you something to chew on. Mortgage rates are at all time lows TODAY!! Currently the 4.5% coupon is trading at par which means the implied rate( you have to add 50bps for servicing) is at 5%. In the next few weeks the probability of the market experiencing below 5% implied rates will set a new low but more importantly it will be the catalyst that unlocks the consumers mindset that it is ok to engage. The reason why a Treasury induced 4.5% rate for purchases is so important is because it will not only provide a huge psychological stimulus it will also pull the existing home market along with it. Add to that a mini refinance and we got ourselves a whole new ballgame. However, I think the most important aspect of an initiative such as this would be the counter effect it would have on the media's negative doom and gloom diet that they try and feed us each day. I for one would like to see the economy engage and leave the media with their jaw on the floor. So my good friend the stage is set it only needs a little push over the edge before we could see some positive news and for certain some positive economic results especially in the housing sector.
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It is not about easy access to credit it is more about qualifying for the credit. Our markets have ignored the fundamentals of credit risk. How many solicitations do you get a week for a credit card? Compound those over the population and you have a credit crisis. We have also evolved into a society that looks at its mortgages as a leverage able asset rather than a debt to be paid as soon as possible. We need to get back to saving rather than buying on credit. But let's not confuse the access to credit with the lack of desire to properly underwrite the ability of one to repay.
Something else to think about. If we are successful in our quest to minimize credit and save more what affect will it have on growth going forward?
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