TMFDeej (99.47)

Getting mortgage rates down is the most effective way for the government to fix the economy

January 26, 2009 – Comments (5)

Despite the Fed's efforts to lower interest rates, like cutting the Federal Funds rate to nearly 0%, the average rate for 30-year fixed mortgages is still sitting at well over 5%.  The gap between the rates on 30-year mortgages and 10-year Treasuries has not been this great during a period of Fed loosening since 1982. The yield spread between the two is currently 2.5%, compared with an average of 1.7% over the past twenty years.

The government needs to find a way for this spread to narrow and do it quickly to put a floor under housing prices and help stimulate the economy.  Getting mortgage rates to drop into the 4s would do much more to put money into people pockets than a stupid piddly one-time $500 payroll tax break from the government would do or those dumb stimulus checks that they sent out last year did. 

For example, if I was able to shave a point off of my mortgage rate by refinancing (I currently have a 30-year fixed at 5.75%), I would save several hundred dollars per month.  That's every single month for the next 30 years, not just a silly one time pop.

Getting mortgage rates to drop further should be priority number one for the new administration.  Of course, my interest in seeing rates drop is somewhat personal because I want a lower rate for myself, but that doesn't change the facts here that getting rates down would likely be the single most effective and quickest way for the government to fix two major problems with the economy...falling home prices and slowing consumer spending.

Putting hundreds of dollars per month back in the pockets of homeowners who refinance and shaving hundreds of dollars per month off of the monthly cost to buy homes that are on the market would be a much better way to stimulate consumer spending than than extending unemployment benefits for a couple of months or tossing people a token $500. 

Studies have shown that one-time tax breaks are more likely saved than spent.  They don't do nearly as much to stimulate economic activity as permanent tax cuts do.  It is unlikely that the new administration will be able to pass through any sort of tax cuts with the budget deficit soaring and Democrats like Pelosi screaming for the immediate repeal of the Bush tax cuts.  If they government won't cut taxes permanently, it can at least cut people's monthly expenses.  Lower mortgage rates would have almost the same effect as a tax cut.

This situation is a little tricky because by making a nice spread on mortgages, banks that are desperately in need of cash are making money, but putting a floor under falling home prices would actually probably be better for banks than having them make a few bucks more on the mortgages that they issue.  One of the main reasons that banks keep going back to the government with their hand out is because the value of the assets on their books keeps falling.  The imploding housing market is one of the major drivers of this asset value deterioration.

I'm usually not one for government intervention.  I prefer the government to spend less, not more and to interfere less with the free markets, not more.  I realize that a 5% mortgage is already a historically low rate.  My being in the same camp as the National Association of Realtors chief economies Lawrence Yun, who also believes that 30-year mortgages should be in the 4% range, makes me sick.  However, if Uncle Sam is going to waste trillions of dollars on all sorts of ineffective programs in an effort to prop up the ailing economy anyhow the government might as well use its money effectively and actually help me out in the process.

Deej