Markets Insight
Last updated: November 2, 2011 7:49 pm
Time for policymakers to get real on US housing
Today, housing represents a record low of US gross domestic product at about 2 per cent compared with more than 6 per cent at its 2005 peak. But the psychological impact of housing on individuals, the stock market and the broader economy is undeniable.
Right now, US residential mortgage rates are cheap, hovering near 4 per cent for a 30-year fixed mortgage, making housing more affordable, and offering a ray of hope that it will trigger a refinancing and buying rebound, right? Not so fast.
When US GDP is reported each quarter it is given in “real” terms. Real GDP is the difference between nominal GDP and the GDP deflator, which is a measure of inflation. Gauging the economy in real terms is eminently appropriate given that the actual pace of growth needs to take inflation into consideration.
So why don’t we do the same thing with mortgage rates? Those are nearly always calculated and shown in nominal terms, without taking into consideration the “inflation” we care about with housing, which is the appreciation (or depreciation) in home prices. After all, it doesn’t only matter what interest rate we’re paying to borrow, but what is happening to the price of the asset we’re borrowing to buy.
To calculate the real mortgage rate you must subtract the appreciation/depreciation rate of home prices. Of course, what really matters are future rises or falls in home prices.
Unfortunately, these are impossible to predict with accuracy. But there are several past performance indices that could be used as a good proxy for the deflator part of that equation. Those doing it for their own mortgages might want to use a local set of figures. For this general discussion, let’s use the change in the median sales price reported by the National Association of Realtors.
Recall the peak in the housing bubble in 2005. At that time, the nominal 30-year fixed mortgage rate was about 6 per cent. The rate of appreciation in the median sales price was about 17 per cent at that time. So the real mortgage rate was actually negative: 6 per cent minus 17 per cent equals a negative 11 per cent. It is no wonder we had a bubble in real estate – who wouldn’t want to borrow at negative interest rates? You could borrow at 6 per cent to buy an asset appreciating at a 17 per cent annual rate.
Fast-forward to the trough following the bursting of the real estate bubble. In 2009, the nominal mortgage rate had dropped to 5 per cent, but we were now subtracting a large negative number – ironically 17 per cent in home price depreciation at the bottom. So the real mortgage rate had actually jumped significantly: to a positive real rate of 22 per cent.
It’s no wonder there was a demand drought. Who would want to borrow at 5 per cent to buy an asset depreciating at a 17 per cent annual rate?
This is what I think policymakers and pundits are missing when they limit the discussion to the nominal mortgage rate and its impact on demand and refinancing. Today we have a 4 per cent nominal 30-year fixed mortgage rate, but we’re still subtracting a negative number for the deflator as a result of continued home price deprecation; the latest reading being falls of 4 per cent based on NAR data: 4 per cent minus a negative 4 per cent equals a “real” 8 per cent. Although it has come down recently, it remains high enough to keep downward pressure on demand.
Last year we did see the real mortgage rate drop to near-zero, but it was shortlived and was largely driven by the federal homebuyer tax credit before its expiration. Those credits did stimulate demand and, for a brief period, an increase in prices, but they did not materially change the trajectory of the housing cycle in the longer-term. In fact, I would argue they delayed the ultimate market bottom in terms of prices, as is often the case with temporary stimuli.
The nominal mortgage rate could drop even further, helped by the Federal Reserve’s Operation Twist, which is changing the holdings and maturity structure of the Fed’s balance sheet, and aims to bring down mortgage rates. But it is important to understand that unless the “still depreciating” part of the equation is solved, you’d be hard-pressed to find a case for meaningfully better demand.
Of course, demand isn’t only constrained by still-high real mortgage rates. The economy remains weak and many households do not qualify for a new mortgage. So, are the recently proposed policy prescriptions an elixir for what ails housing? The revamping of the Home Affordable Refinance Program (Harp), announced in October, should help underwater homeowners refinance at lower rates.
.
That could have an impact on prices, but likely only at the margin until supply and demand moves back into balance. A focus on what really matters – the real mortgage rate – might help tip the scale back in our favour.
Liz Ann Sonders is senior vice-president and chief investment strategist at Charles Schwab
0 comments:
Publicar un comentario