Mortgage Rates: Will The Fed End The Real Estate Recovery?

Fed Rate Increase?

The Federal Reserve is at it again, threatening to once more raise bank rates. One consequence of such an increase could be rising mortgage rates and an end to the real estate recovery.

Right now the housing market is recovering. July new home sales were up 31.3 percent when compared with a year ago. June existing home prices were up 52 months in a row. According to the National Association of Realtors, unit sales in June were at their highest level since February 2007.

Meanwhile, the Fed’s efforts to raise interest costs have been a flop. The Fed raised bank rates by .25 percent in December and two things promptly happened: First, the prime rate rose by .25 percent BUT the rates paid for CDs and savings didn’t budge.

Second, mortgage rates fell. The Fed does not control mortgage rates and after the Fed’s December rate hike mortgage rates went from 3.97 percent to 3.43 percent last week according to Freddie Mac. That’s more than a half percent DROP,

After the remarks last week of Fed Chair Janet Yellen and Vice Chair Stanley Fischer, it appears that the Fed once-again wants to raise bank rates and — who knows — maybe mortgage costs will also go up.

We now have three Fed rate choices:

  • It can raise rates.
  • It can leave rates alone, at least until after the election.
  • Or, just a thought, it can lower rates.

Sure, the last option seems a little flakey but has anyone noticed that more than $13 trillion is invested worldwide with negative rates — a huge pool of capital that can do better in the US. Or that banks have $2.2 trillion in excess reserves, money they are either unable to lend or are refusing to lend.

It can be argued that the banks are smart to not make loans at this time because they can do better when rates rise. Of course, if rates don’t go up that argument becomes less compelling.

Here’s a thought for the day: With things going so well maybe the Fed should continue it’s policy of doing nothing. I know, it sounds like a Seinfeld episode, but then so does a lot of life. Trying to push mortgage rates higher will only make the real estate market more dicey, a market where 6.7 million homes remain financially underwater.

Mortgage Rates

What, exactly, is wrong with strong real estate sales and what the government says is growing employment?  Why should we complain about mortgage rates near historic lows? As to worries about inflation, just how much inflation is there? Last month it was .8 percent, a long way from the 2.0 percent that so worries the Fed.

The real question we face is what represents a bigger danger to the economy — the Fed acting or the Fed not acting? So far this year inaction is looking pretty good.

(Photo courtesy Christoph Schulz)


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3 Comments on "Mortgage Rates: Will The Fed End The Real Estate Recovery?"

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  1. Expat says:

    “People” aren’t making negative interest rate loans, governments are. And if other investments are bad, it’s because the underlying economy is bad. ZIRP and now NIRP are designed to prop up unproductive assets, not lead to productive investments. So while investors may prefer Swiss bonds at -1% to investing in bubble stock markets, this is not because the market is naturally at that level but because centrals banks have pushed rates artificially low.

    The idea that negative or zero interest rates should be maintained simply to support a housing bubble is narrow-minded and self-serving (in this particular case). House prices are far too high by any normal measure (long term income to price ratios, for example).

    Is zero interest a natural rate? I doubt it and I doubt you will find any banker or economist who agrees. So what happens in three or ten years when mortgages rates return to, say, 7-10%? Repayments will skyrocket and house prices will collapse.

    Housing is not an asset, it’s a commodity that is consumed. Making shelter unaffordable to most is a fairly horrific government policy, but seems to be the order of the day.

  2. The reality is that lots of people worldwide are making loans with negative interest. The reason is that other investments are worse. thus it is “relatively” better to lose a small amount rather than to lose a larger amount.

  3. Expat says:

    Well, if you actually care about affordability of housing and sustainability of debt, then your “recovery” is simply another massive bubble in real estate.
    But since you are a broker who lives off high prices and rising markets, you don’t care, especially since you figure the tax payers will be there to bail you out…again.
    Would you lend me $100k at -1%? No? Why not? If not, then why should I lend it to you?

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