Friday, December 19, 2008

Mortgage Financing on the Cheap... Will It Work?

Bloomberg reports:

The average rate on a fixed 30-year mortgage fell to 5.18 percent last week from 6.47 percent in October, according to Mortgage Bankers Association data.
Looking at daily data, I'll go ahead and project that next week's figure will look much better. After the Fed announced Tuesday they would be buying mortgages, rates tightened another 60-70 bps to a rate of ~4.4% (according to Barclays)!

Funny thing is... at this point the rate cut to prop up housing feels an awful lot like OPEC oil cuts to prop up the price of oil, with the obvious difference being trying to stimulate demand vs. halt supply?

My question... will either work in the short run?


  1. Does the short-run really matter? This isn't a quick fix crisis. Trading these short-term moves is a dicey proposition based on isolated moves alone. The real it even a whether these moves will work at all for housing. The easy answer is no. Low rates do nothing to stop the macro fall in house prices and you can't refinance or buy unless you have stellar credit and 20% down/equity. As the saying goes, in bad times banks will only lend to those who don't need to borrow. This will just make people buckle down for even longer in their homes while not stimulating much new demand on the macro picture. These makes housing even more illiquid as people hunker down in their homes to ride out the 30 year mortgage.

  2. As Keynes once said "we're all dead in the long run". So yes, the short run does matter. Especially when the short run could mean Depression.

    While I agree that low rates don't do much (i.e. I will not buy a home even with 0% financing if I think the home price will drop another 20%), it will bring in a mrginal buyer which is positive for price levels.

    In addition, your point that this will cause people to "buckle down" is also positive for home valuations as this would directly decrease the supply of homes in the marker. Less supply = higher values.