Friday, September 21, 2012

Take the long way home

A fair amount of the Fed's post-crisis "unconventional policies" have been aimed at the housing market. QEIII in particular. Often, these policies are evaluated on a very short term basis. Before and after the announcement like a pseudo event study is one popular method. Looking at what happens to rates after the policy ends is another. We've all seen charts of the last five years with vertical lines indicating the beginnings and ends of various Fed policies, with credit or blame assessed as desired.

But the basic fact about mortgage rates in this country is that they've been secularly falling. Here's a graph of the average 30 year fixed rate. Data are from Fred.

(clic the pic for an even more ski-slope image)

Rates are less than half what they were in 1976 when this data series begins. Rates have been steadily falling since 1982.

In other words, we've seen a steadily falling trend in mortgage rates over the last 30 years with a fair amount of short run noise around the trend.

Given that context, I think we are putting way too much emphasis on very short run movements in mortgage rates as an indicator of the effectiveness of particular Fed policies or announcements.

I also think, given mortgage rates are already at a 35 year low, that driving them down even more is not going to be a big boon to the housing market. I don't see how it helps re-financers all that much either. If you refinanced at 3.75 are you going to do it again at 3.49?



PS: Do I think the modern Fed deserves credit overall for this falling trend? Sure, just as much as they deserve blame for the ultra-high rates in the late 70s and early 80s.


3 comments:

Thomas W said...

I think there's another implication to lower mortgage rates.

While house prices are generally tracked when measuring the real estate market, the number that really matters is the house payment. With a 3.5% mortgage a typical borrower can afford a house priced 2-3 times higher than with a 10% mortgage. Looking at house prices, much of the rise over the past 20 years disappears if the mortgage payment is tracked instead.

I think this leaves the government in a dilemma. If mortgage rates go up, house prices are going to weaken or go down. So the government is stuck trying to keep rates down, driving all interest rates down. If mortgage rates were to go back to a more typical 6-8%, we’d see another housing bubble.

roofing materials cost said...

Our modern age has drastically changed the lifestyle of many. With business travel, military assignments and even some families owning more than one home, house sitters never have to fear being without a place to lay their head at night.

mortgage loan modification said...

Mortgage rates are the determining factor in choosing the type of loan and the lender.

mortgage loan modification