Turn just about anywhere and you can find reports of a widespread housing recovery. Home prices are up, foreclosure levels are down, interest rates remain at record low levels, and consumer confidence has been rising.
But something is missing.
Given that mortgage interest levels are well below 3.5% for qualified borrowers it might seem as though the marketplace is flooded with cash from mortgage investors. With much of the world economy in upheaval there's no doubt a lot of money is coming to the United States in an effort to find safety and security. But does foreign capital fully explain why interest rates today are so low?
If the answer to the question is “yes” then one has to ask why the Federal Reserve feels compelled to buy additional mortgage-backed securities worth $40 billion a month? If there's so much private capital out there then why should the government be in the MBS market at all?
We want private capital in the marketplace to assure that mortgage money is universally available to all qualified borrowers and to hold down interest rates. But interest rates were down in September — down to 3.55% for 30-year fixed-rate mortgages — when the Fed began its current MBS buying spree and now the Federal Reserve action is driving mortgage rates even lower, about .20 percent lower according to Federal Reserve Governor Jeremy C. Stein.
Lower mortgage rates are certainly good news for those who want to buy real estate or refinance. However, there is a real cost to low interest rates, a cost which is not often discussed.
For generations we have said to people, “think about the future.” We tell our children to save, that capital formation is a good thing, that cash talks and, er, nonsense walks.
But in today's world we don't really do much to encourage savings. The yield on a one-year CD is now around .75%. At the same time the rate of inflation was 1.8% in November. Someone who invests in a CD or other low-risk financial instruments loses buying power and buying power is the way we measure wealth.
While low interest rates are great for borrowers they harm the interests of those who have followed the rules and saved. Millions of savers — including people who today are retired or retiring — have less disposable income than would otherwise be the case if our national policy did not dictate historically-low interest rates.
If there really is a housing recovery — and any number of signs, signals and studies say there is — then why is it that the private sector does not want to put up the capital necessary to support the real estate marketplace? Where is that money? Why, instead, do we need the Fed to spend an additional $40 billion a month for securities which the private sector should be snapping up? What would happen to interest rates, home sales and loan originations if the Fed buying spree ended?
So when will the housing recovery be real? When the private sector has enough confidence to absorb the mortgage-backed securities now being purchased by the Federal Reserve.
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