Mortgage Rates Are Too Damn Low
Posted by Jonathan J. Miller -Tuesday, August 9, 2011, 11:01 AM
8 Comments
S&P downgrade aside, one of the things that is very apparent today: banks aren’t excited about mortgage lending and credit isn’t easing keeping the pressure on the housing market. To be clear, credit has slowly begun to ease in many sectors except for residential lending.
Banks continue to require AAA AAAA quality residential mortgage applicants and they are few and far between.
But banks are in the business of lending so why does credit remain so tight?
Despite the bank bailouts in our post-credit crunch world, a compromised Dodd-Frank financial reform law and a host of pro-banking hat tips from Washington in the name of stabilizing the financial system, lenders are still not compelled to lend.
For the past two years it has been nothing less than surreal to hear the political establishment beg banks to lend, plead with them to ease their underwriting standards, cajole them to modify existing mortgages, try to be more flexible with short sales, attempt to be more hands-on with foreclosures. All this posturing after they (the federal government) had bailed the banks out. Crazy.
Bailouts and government stimulus aside, who can blame the banks for being reluctant to lend? They are confronted with a legacy of bad or non-existing underwriting standards from mid-decade that they know all too well – because they created it.
At the same time, the Federal Reserve continues to provide near 0% free money to lenders in order to “prime the credit pump” by keeping interest rates artificially low. The hope is to stimulate the economy by providing lenders with access “free” money to lend and “enjoy the spread.”
It sure looks like banks are faced with an economic choice that the Fed and Washington doesn’t seem to understand:
Banks can…
a) issue mortgages at 4% to borrowers who are face:
- Unemployment stuck in the 9’s % with more layouts to come – little improvement expected over the next few years.
- Housing prices sliding in many markets.
- GDP slipping, a weakening economy with rising concern about a “double dip.”
- A tidal wave of foreclosures that have been held back as a result from the “robo-signer” scandal last fall.
or….
b) borrow money for free from the Fed, invest and make 4% virtually risk free.
“b” seems like a fairly obvious choice, no?
Mortgage rates remain at record lows yet the housing market remains weak. Low mortgage rates aren’t helping the housing market anymore. Low mortgage rates are the problem. Sure home affordability declines as mortgage rates rise, but rates are at record lows and the economy is sliding and the housing market remains stuck.
The missing ingredient for a housing recovery is consumer access to credit, NOT low mortgage rates.
Let mortgage rates rise to their natural levels so lenders will be incentivized to lend and credit will ease. Until the Fed changes its view, there is no incentive for banks to change their behavior and housing will continue to suffer.
UPDATE: Looks like at least 2 more years of low rates – Its Forecast Dim, Fed Vows to Keep Rates Near Zero [NYTimes]
Inspiration for the post title
Yet ANOTHER great post! Is there any hope that Washington will start taking steps that will actually help this economy?
I am actually in the process of buying a short sale condo, and was put off by how low rates are. You are virtually assured that rates will never be lower. So you are going to get a nice low payment, but future rises in rates are going to give a lot of headwind to house prices in the future. I am definitely going to “pay” for my low rate (3.75%)
Looks like the powers that be aren’t paying attention:
“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm
Jonathan, great post, thanks for making me think hard!
You bet Keith. Thanks. I feel like we need to do the opposite of Washington is thinking. Reactive policy decisions have been very damaging to housing.
[...] Matrix, Jonathan Miller suggests that interest rates are too low and that, paradoxically, higher mortgage [...]
Related article that supports your point from Moody’s:
http://www.economy.com/dismal/pro/blog.asp?cid=223962
Though I’m not sure I agree a mini refi boom would boost the consumer economy — it may just help them deleverage faster.
[...] Low mortgage rates are a key reason why the housing market and the economy remain anemic. [...]