Why Aren't Consumer Rates Going Down?
February 29, 2008
– Comments (12)
I was reading a story about the disconnect between the fed lowering rates and how it simply isn't being passed on to consumers.
In Canada we've never had long term mortgage rates, but the current rates are amortized over 25 years and the rate resets at the end of term, which is generally between one and five years. There was usually about a 2% premium you'd pay on the 5 year rate, which was the cost of knowing your payments would not go up for 5 years. That spread hardly exists anymore. Indeed, in a couple cases 5 year rates are cheaper than one year rates.
When I look at Bankrate.com I see 5.88% for a 30 year term and 5.18% for 15 years, a mere 0.6% premium for an extra 15 years, again, not much of a spread, yet a whole lot longer to not have money available for investors.
The spread between short and long term rates is coming back.
It seems to me that it is an exceptionally good idea to long in rates when they are low. I found a link for prime lending rates in Canada going back to 1974.(pdf) Looking at the history, an investor is taking huge risks with their capital to under perform, a grossly under perform, by making it available for long term mortgages. In June of 78 the rates were at a low for the period, 8.25% and just three years later, in August of 81, they peaked at 22.75%. This is the environment I worked in banking and that I saw people losing their homes. But consider that rates almost tripled in the space of three years. If you have debt and it is adjustable rate debt it is fool hardy to gamble like this when rates are at record lows.
Think through the losses, like from this kind of thing... Are you going to loan your money without demanding a premium and tighter lending standards? I would suspect that Ben could lower rates another percent and still very little would be passed onto consumers. It isn't about real interest rates versus nominal rates, but whether investors think 6% over 30 years is a fair return for the risk. I think the rate is low for the risk at this point and lowering rates doesn't lower the risk.
I could be wrong, but I think lending rates will go higher, in the range of historical rates, and money will leave equities for safe deposits
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