Very low interest rates are actually not all good for the housing market
Have you noticed that despite the very low interest rate environment, it fails in part to truly lift the housing market? You see in the news that 30-year rate mortgage keeps hitting record lows so you think this should indeed be very good for housing. I am sorry if you have been led down this path by the media and overzealous realtors – quite frankly, they are wrong.
Where is the disconnect, you ask. Well, this is where one needs to do some thinking outside of the box: What is missing from inside the box is “Greed” or a kinder a way of saying is “Risk/reward.”
Banks and mortgage originators, despite their friendly commercials, are in the business of earning money out of you. Plain and simple they are in business to take always as much of your hard-earned money as legally possible.
To them, lending you money at a very low rate of, say 3%, does not have much reward – lending you money at 7% is much more rewarding, even if it incurs more risk. Let me explain by using and example:
“Household 1 Park Avenue” with very excellent credit rating wants to borrow $500,0000 at 3.5% for total payment over 30 years = $808,280 (Monthly payment of $2,245.23 for 360 months)
Bank gets a of Profit = $308,280 ($808,280 – $500,000 = $308,280)
“Household 5000 Eldorado St.” with a below-average credit rating wants to borrow $250,000 at 7% total payment over 30 years = $589,772 (Monthly payment of $1,663.26 for 360 months)
Bank gets a of Profit = $$348,772 ($598,771 – $250,000 = $348,772)
In the bank’s view, Mr. Below Average is a much better customer because they only need risk 50% less money but they have much more reward. Even people with excellent credit ratings are being turned down for home loans, because the bank also knows there is a much quicker way of making money in a bad economy:
In a bad economy, millions of people temporarily overdraw their account for a few days. Example: You write a check for $150 thinking you still have $200 but you forgot about that credit card (this could be for anything such as a gym membership) from the same bank that offers “annual free period” which is now over, and the bank took out the $55 fee without notifying you so you are now overdrawn by $5 and they charge you $35 that is 700% for a week.
My view is that the Fed needs to be patient and let the free market work things out. There are times they need to intervene, such as when business and consumer spending come to a drastic halt as we saw in late 2008 and early 2009, but being overly aggressive and trying get mortgage rate to extreme lows will only hurt the overall housing market.
In a higher interest rate environment, the greed factor will kick in and banks will lend to millions more homeowners, which will boost the real estate market. The Fed can push interest rates as low as possible; but THEY CAN NOT FORCE THE BANKS TO MAKE A LOAN!
Remember: Alan Greenspan tried to slow the booming stock marketing down the mid 1990’s by repeatedly raising interest rates (over 10 times) every month and not giving the market time to work itself out. Well, it was one very the painful lesson we all learned in early 2000 when the stock market came crashing down.
So today as the world looked on, the FED imposed QE3 (3nd quantitative easing). I had hoped they would do the right thing and let the market work itself out.
Some very good and promising news for the US Economy:
1) AIG this week have now repaid the US government all of the money that was use to baled them out with profit if over $15 billion and more to come.
3) Today, all the US Stock Markets hit a four-year high, which is very unusual for the summer months.