One of the ways that we navigate through life is by using rules of thumb. I guess it keeps us from spending too much of our precious brainpower on reinventing the wheel. As a general proposition they are useful tools, but sometimes they can lead us astray. This may be the case with our government’s policy of maintaining ultra-low interest rates for the better part of a decade.
Low rates are supposed to be a tonic for whatever ails you economically, whether it is lagging corporate earnings, sagging stock and bond prices or stagnant home values. Historically low rates have helped each of these industries; however, that may no longer hold true in terms of the housing market.
It is no secret that we have experienced a fairly anemic recovery from the Great Recession. With interest rates and inflation as low as they are, the economy should be booming. Yet it is not. The lack of a recovery in housing has been identified as a prime culprit for our weak recovery. Yet how can that be with interest rates the lowest they have been in anyone’s lifetime? It doesn’t make sense if you believe that the cost of money, that is interest rates, is an essential element of any thriving housing market.
At this juncture, access to low rates is more critical than the actual rates themselves. The frustration most people are experiencing is that The Fed can control the price of money, but not the access to it. That is the province of banks, whose earnings are still reeling from prior losses and newly-imposed fines and regulations.
The problem with mortgage rates this low is that the profit margins banks enjoy are really too low to absorb very many losses. Higher interest rates would increase their margins and could encourage them to accept somewhat more risk in their mortgage portfolios.
The mortgage conundrum is like anything else in life: what good is a great price if someone cannot deliver the goods?