Often, what turns up on the mainstream media reads like a parody of what is in the mainstream media. The lack of self-awareness is breathtaking. Of course, this is, in part. the result of being in a bubble, insulated from the rest of us. Even so, it seems that someone inside the bubble should notice that stories like this strike people outside the bubble as a bit bizarre. Apparently, no such person exists.
The super-low mortgage rates that tens of millions of Americans locked in during the refinancing boom are now discouraging many of these borrowers from buying another home and giving up those loans.
The multiyear refinancing craze, which included some of the lowest rates ever recorded, freed up cash for borrowers to sink into the economy. But refinancing activity began receding last spring, and rates have been rising since. The average rate on a 30-year, fixed-rate mortgage hit 4.32 percent this week, up from 3.54 percent a year ago, according to mortgage-finance firm Freddie Mac, based in McLean, Va.
The higher rates, soaring home prices and a tight inventory have kept potential buyers on the sidelines, hurting the sales of previously owned homes and undermining the recovery of the housing market, a huge contributor to economic growth. Homeowners who are reluctant to move and lose their low rates — a phenomenon that economists call interest rate “lock-in” — could slow the churn of home sales across the country.
Just let that roll around in your head for a bit. If home prices are soaring, that must mean buyers are bidding up prices. Otherwise, the houses would remain unsold, forcing sellers to lower prices eventually. That’s how markets work, when left alone. On the other hand, if rates are discouraging buyers, the banks will eventually have to lower rates to attract new borrowers.
A healthy turnover of homes is critical to a robust housing sector, enabling critical first-time home buyers to enter the market and existing homeowners to move or trade up. But housing experts worry that interest rates, which are expected to gradually rise to nearly 6 percent by late next year, will chill enthusiasm for home purchases. They say they’re already seeing signs of that, most recently among existing homeowners.
This is he problem of libertarian economics. They never see the other side of the balance sheet. Artificially suppressing interest rates today has consequences. There’s another side of the entry and it will make itself know eventually. In this case, pulling forward demand for housing with cheap credit means demand will be below average at some point in the future. Cheap credit is eating your cake before you bake it.
It’s too early to quantify the impact of the lock-in phenomenon. But it’s happened before and could happen again, say researchers who have studied the effects of rising rates on housing turnover. Statements by Federal Reserve Chair Janet L. Yellen this week sparked investor fears that the agency could soon begin allowing a key interest rate to rise, helping push mortgage rates even higher.
Ella Lore said she and her husband are fence-sitting. Now that their daughter is studying abroad, they would like to sell their D.C. home, buy a two-
bedroom condominium and rid themselves of the hassles and costs of maintaining a large home.
But when they did the math, they discovered that they would be paying about the same amount each month for considerably less space partly because of rising mortgage rates, Lore said. The couple refinanced into a loan with a 2.8 percent rate in 2012. Now, with a new loan, they’d get a 4.25 percent rate.
For two decades, people ave been planning and building their lives in a world of artificially cheap credit. When that cheap credit begins to unwind, suddenly everyone, even the prudent, have unanticipated problems. Think of it this way. If tomorrow the poles reversed and north was now south and south was now north, what would have to change in your life? The answer is everything.
Most of what you depend on, at some level, relies on the long held assumptions about the earth’s magnetic field. Money is just about as important. Credit is our money now, so when it gets more dear, money becomes more dear. That changes every financial relationship on earth. That either happens gradually or it happens all of a sudden, which is more likely as the gradual approach is delayed.