Just Try to Refinance. I Dare You
The bond market seems to have had its own flash crash this week. The yield on the 10-year U.S. Treasury bond dipped briefly below 2 percent, as panicked equity sellers looked for a safe place to park their cash. Treasuries, of course, are the world's option of choice, the safest and most liquid port during the storm.
Demand for bonds has helped drive down mortgage rates as well. Bloomberg News reported that "U.S. mortgage rates plunged, sending borrowing costs for 30-year loans below 4 percent for the first time in 16 months, as signs of a slowing global economy drove investors to the safety of government bonds." Almost immediately, lower rates worked their way through the entire credit complex.
The average rate on 30-year fixed home loan is now 3.97 percent. To put this into context, the median U.S. home price is $219,800. Put down 10 percent and that $200,000 mortgage costs the homebuyer $951 a month. A decade ago the same mortgage would have cost this buyer as much as 6.34 percent. The monthly payment would have been more than 25 percent higher at $1,243. The chart below shows the long decline in rates:
Under normal circumstances, this decrease in rates should have far reaching and beneficial effects on the economy. It would spur increased investment in real estate. Mortgage refinancings also would rise, and that would put a little more discretionary cash in the hands of consumers each month.
As rates fall, one would expect sales of new and existing homes to rise. Lower financing costs should mean higher sales volume, along with some price increases as well. An increase in home sales tends to boost purchases of washing machines, furniture, TVs, cars and other durable goods. The increased economic activity eventually results in more hiring, increased wages, higher spending, all leading to a virtuous cycle.
The key phrase in the prior paragraph is "Under normal circumstances." These are decidedly not normal circumstances today, thus the unsatisfying economic growth we confront today.
The key reason for this? Banks. The traditional mortgage lenders -- whose depository accounts are guaranteed by the Federal Deposit Insurance Corp. and can borrow from the Federal Reserve at near-zero rates -- learned the wrong lesson from the financial crisis. What they should have figured out is it is a terrible idea to ignore traditional lending standards when approving a mortgage.
Instead, however, the banks learned an entirely different and utterly incorrect lesson. The pendulum has swung from one extreme to another. A decade ago, they gave loans to anyone who could fog a mirror, then sold the loans to Wall Street for securitization. Today, the opposite extreme has taken effect. Banks have avoided making loans to many qualified borrowers, regardless of their credit history, income and ability to service that debt. When former Fed chief Ben Bernanke has trouble refinancing his mortgage, you know there's a problem.
The data and details of the mortgage market will be the subject of a column next week. For today, I want to leave you with this single thought: The inability of qualified borrowers to obtain credit to either refinance their existing mortgages or make a home purchase is an enormous drag on the economy. Real-estate transactions that would normally occur at this point in an economic recovery have been missing. So too are all of the positive secondary economic effects discussed above.
Don't take my word for it. Rates are at the most advantageous levels they have been in years. The typical reader of this column is a high net-worth professional, who owns one or more homes. Some are owned outright, others have a mortgage or home-equity line on them.
If you want to understand a large part of why this economy has been so moribund, you need to understand what is happening with real-estate credit. You should experience firsthand what has changed to the process of financing a home purchase.
Go ahead and try to refinance. I dare you.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Barry L Ritholtz at firstname.lastname@example.org
To contact the editor on this story:
James Greiff at email@example.com