The helpful notices (via computer and texting) from RateWatch that track the rise and fall of the Fannie Mae coupon have to be viewed differently today than they were a few years ago. Specifically, when the coupon rate declines, the service tells us this very likely portends a “favorable” move for interest rates.
What, we must ask, is “favorable”? For years and years, “favorable” meant that rates would probably decline. Simple as that—and also very helpful to the mortgage market because lower rates are attractive to those wishing to finance (or, even more particularly, to refinance) a home mortgage.
A lower mortgage rate means the effective cost of purchasing a home falls. And that hasn’t changed.
What’s changed is that, while significant declines in interest rates still do stoke the volume of refinances, they have minimal effect on purchase money originations. In a very real sense, lower rates may even be antagonistic to the possibility of rising purchase money mortgage volume.
This may be obvious, but it is generally overlooked—especially in national policy. The Fed recently promised that it will keep interest rates low until mid-2013 at the least. The credit markets responded briefly with lower interest rates (that is, lower yields on Treasury securities) and the stock markets reacted even more briefly with higher prices for equities. It was a knee-jerk reaction, but it had no conviction to it.
The fact is, lower interest rates indicate that the economy may be in even worse shape than we thought it was. At the very least, rates that remain low are indicative of a lack of improvement. And a lack of improvement is not conducive to home purchases. If jobs numbers aren’t improving at a meaningful pace and everything from retail sales to orders for manufactured goods remains relatively weak, you can throw a mortgage sale in the real estate sector, but most people won’t come out and buy.
It is odd, therefore, that the Fed and other policy-makers continue to hold to low interest rates as a necessary (if not sufficient) answer to our economy’s woes. They seem to say, constantly, that consumers wouldn’t spend freely and businesses wouldn’t borrow or hire if rates were to rise—even by a small amount. The fact is, though: consumers AREN’T spending freely, nor are businesses borrowing or hiring at a meaningful pace.
So we end up waiting at the bus stop for something to arrive, but nothing does. We should not be surprised. Even those retirees who would be spending more if they were only earning a decent return on their savings are waiting with us at that quiet bus stop, watching intently as nothing happens.
Now, does all of this—as obvious as it appears—suggest that the Fed and others should be readier to allow interest rates to creep higher? Perhaps. In fact, perhaps keeping rates low is a knee-jerk response whose time has come and gone.
At the very least, the lack of benefit from low rates suggests that we really can’t have an economy that is making much-needed forward moves unless we have rising interest rates. But old habits die hard. If rates were to rise a bit, most analysts would probably moan loudly that higher rates will push us into recession.
I submit that we need a little genuine “Yes, we can.” We can stimulate our jobs market. We can make it more profitable to save. We can help the economy advance. Not with yet another, feebler, even more expensive quantitative easing program. But, in part, with less manipulation of interest rates. If rates have an inclination to move higher, that sounds worthy of quiet celebration. It may be a sign of potential economic growth.
Let’s not rush to put out the fires that could bring a little warmth this winter.
by: Bill Fisher
