4.5% Mortgages: Will They Accomplish Anything?


If the goal is to spur refi’s and save homeowners some cash, then the Treasury’s (reported) plan to force mortgage rates below 5% should have some effect. But if the goal is to actually get homeprices back up, there’s debate on whether that will work:

TIME: A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. “The relationship between mortgage rates and home prices is pretty obscure,” says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business.

James Hamilton, a professor of economics at the University of California, San Diego, says he used to think that lower mortgage rates were responsible for rising home sales in the first half of this decade, and for that reason he projected home prices would rebound in 2007. He now says rising home sales were the result of deterioration of lending standards and not lower mortgage rates. “I was wrong. The real story with home sales has to do with the availability of credit,” says Hamilton. “And credit is tight now.”

True. We may be able to push rates back to where they were during the height of the boom, but we’re not going back (hopefully) to no-doc, no down payment, no income verification mortgages that dramatically expanded the pool of potential homeowners beyond its historical norm.

From this same article, the reaction to this news from the NAR is astounding:

Proponents of the plan say the plan would be costless, and might even turn a profit. That’s because based on current Treasury bond yields, the government can borrow money at 2.7% to fund the program, pocketing a profit of 1.8%. “It raises the question as to whether the government should be offering low mortgage rates all the time, not just during a crisis,” says Laurence Yun, chief economist of the National Association of Realtors, which has been pushing for a plan to lower mortgage rates for the past month.

Brilliant. As David Merkel of Aleph Blog put it, “We’re all hedge funds now.” When the government is borrowing short cheap and lending long at a higher rate, it really is basically a big hedge fund or investment bank trading desk. Sure, why not do this all the time? What could go wrong?

(HT: Felix)

See Also:
4.5% Mortgages: Deja Vu All Over Again