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Wednesday, September 26, 2012
Mortgage Rates 2.77% - Heading Even Lower?
Mortgage rates are beside the point. That may come as a surprise to members
of the Federal Reserve. But then again, probably not.
The Fed’s third round of fiscal stimulus announced earlier this month differs
from previous rounds in that it directly targets the housing market in an effort
to create a domino effect that will ultimately create jobs and lift the broader
Specifically, the central bank said it will start purchasing $40 billion in
mortgage-backed securities each month, an open-ended policy designed to keep
mortgage rates low and perhaps push them even lower.
But how much lower can they go? On Tuesday the national average for a 30-year fixed rate mortgage stood at an all-time low of 3.49%, according to mortgage
servicer Freddie Mac. A 15-year mortgage can be had at 2.77%, also an all-time
Leif Thomsen, founder and chief executive of Walpole, Mass.-based home-loan
lender said it doesn’t really matter anymore how much lower mortgage rates fall.
“It has nothing to do with the rates,” Thomsen said. “They’re perfectly fine
where they are.” What needs to change, he said, are lending guidelines that remain too strict
for many potential homeowners who might otherwise be in a position to take
advantage of the historically low rates and vast surplus of available
Another thing that needs to change, according to Thomsen, is the status of
millions of home owners whose mortgages are under water, meaning the amount they
owe on their loan is greater than the value of their home.
Housing is the Right Target Regardless of where mortgage rates go under the Fed’s newest round of
quantitative easing, Thomsen said the central bank was right to target the
housing industry because of the sector’s broad reach across the economy.
“That’s where we need to focus. Housing is such a huge percentage of GDP.
When someone buys a new home, they’re not just buying a home. So much of the
economy is tied to the housing industry,” he said.
In speeches and comments made after the new stimulus was announced on Sept.
13, Fed policy makers have suggested the latest move was an effort to maintain
and hopefully build momentum for recent gains achieved in the housing
If mortgage rates fall a bit lower, that’s fine, the Fed members have said.
But the real goal is to create a solid foundation beneath the fledgling
recovery, one that generates increased demand and ultimately stimulates job
creation in the myriad areas of the economy directly tied to housing –
construction, retail, lending, etc.
There’s growing evidence to support that premise. The latest S&P /Case Schiller Home Price Index, which gauges home values
in 20 U.S. cities, rose 1.6% month-over-month in July, slightly lower than
economists had hoped for but a gain nevertheless. It was the third straight
month prices rose in all 20 cities.
Anthony Sanders, a finance professor at George Mason University, agrees that
mortgage rates are neither the problem nor the solution.
“Unless (mortgage servicers) Fannie Mae and Freddie Mac loosen up some of
their credit standards or the banks get back in the game for their own
portfolios, the Fed could lower mortgage rates to minus 10% and it won’t
stimulate a housing recovery. The problem really is that credit is too tight and
money velocity is too low,” Sanders said.
Money velocity, a fairly arcane gauge of economic activity, is defined by the
Fed as “the rate of turnover in the money supply,” or “the number of times one
dollar is used to purchase final goods and services included in the GDP.”
Fiscal Cliff Could Kill Momentum If the rate of velocity is swift it’s good for the economy. It means
transactions are taking place and money is exchanging hands. If the velocity
rate is slow it’s bad for the economy because consumers and institutions (banks
and corporations) are holding on to money and therefore impeding
The latter is currently the case, and it’s getting worse. According to the Fed, which tracks money velocity, the measure fell again in
the second quarter of 2012 and has hit its lowest level in five
Unless banks start opening their coffers and lending money again,
specifically in the form of mortgages, Sanders said no amount of Fed stimulus
will help spur an economic recovery. What’s more, any housing recovery that’s gaining steam through the end of
2012 is bound to be derailed by the looming fiscal cliff, Sanders warned.
If Congress fails to reach a compromise on spending and the Bush-era tax cuts
are allowed to expire, taxes will rise for millions of Americans. If that
happens demand for homes is certain to plummet again. “The housing market is
partially self-correcting because housing prices are going up. But when the
fiscal cliff hits, let’s see how much legs the housing recovery has,” Sanders
Sanders described the government’s housing policy as “schizophrenic” because
on the one hand the Fed is trying to pump up demand by lowering mortgage rates
while at the same time the Obama administration has said it will raise taxes by
allowing the Bush tax cuts to expire for those making $250,000 or more.
(Republicans want to extend or make the cuts permanent for all incomes.) “They’re pulling in opposite directions. They can’t have it both ways,” he
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