The Federal Reserve’s announcement this week that it would keep a key interest rate near zero seemed designed to be a chill pill — a way to calm jittery stock market investors by showing that it recognized, and was trying to manage, economic weakness. Whether the announcement was good for real estate is another story.
In a normal world, mortgage rates would track the Fed’s benchmark rate. And indeed they have, with 30-year fixed mortgages dropping to 4.32%, near the historic low of 4.17% they hit in November.
(MORE: Homeowners Should Lock In Their Rates)
However, normal world step 2 would be for those low interest rates to encourage housing consumption. If the government is going to effectively subsidize loans, then the play should be to take out a loan and buy a hard asset with it. For most of us, this means buying a house or an apartment.
The problem is that we’ve already been in a low-interest rate environment for years. When I bought my current place two years ago, I remember nervously watching the mortgage market with the hope of getting an adjustable rate below 5 percent. Fixed rates at the time? In the low fives.
To anyone with a historical sense of the housing market, these were themselves laughably low rates. We spent most of the 1980s in a double-digit interest rate climate. Anything below 6% on a 30-year-fixed — which is where we’ve been for most of the past few years — is basically free money.
But you can’t make something more free. Homebuyers who were going to take the mortgage rate subsidy and buy property already have; keeping rates low may attract a few new entrants to the homebuyer ranks on the margin, but it isn’t going to cure the housing crisis.
(MORE: Low Interest Rates Crush Retirees)
If anything, low interest rates might encourage retirees — who are getting kicked in the teeth with low bond yields — to sell their already-paid-off houses. Those retirees who “did everything right” and dutifully gathered a stocks-and-bonds nest egg are now finding that it doesn’t make much of an omelet. Since Social Security by itself is tough to live on, there will be pressure to turn to one’s last major source of cash: the family home.
I think that senior-seller effect, however, will be counterbalanced by the effect that predictable interest rates will have on overseas investors. The U.S. economy, while groggy, has been luring foreign homebuyers. Overseas buyers spent $82 billion in the 12 months ending in March, up 24% from the same period the year before.
The Fed’s committment to nearly zero interest rates should continue to make those properties look like safe havens to the Canadians and Chinese who are already shopping here.
In sum, I don’t think a zero climate is going to change the real estate outlook much one way or the other. Which is too bad, because the housing market sure could use a stimulus if we could find one.