Mortgage rates rise despite Fed cuts
Though the Fed cut interest rates dramatically, the average 30-year fixed mortgage rate has gone up since the beginning of January. Jeremy Hobson reports why banks aren't interested in dropping rates for long-term loans.
Houses on bar graph (iStockPhoto)
More on The Economy, Housing - Real Estate, Work and Family
TEXT OF STORY
KAI RYSSDAL: The hope is those new loans John was talking about will get the housing market healthy again, and soon. Cheaper mortgages are the other thing you'd think would help -- and in a perfect world, when the Fed cuts its interest rates, mortgage rates would fall too.
As of last week, the average 30-year fixed- rate mortgage was slightly more than 6 percent, actually higher than in the beginning of January. What gives? Here's Jeremy Hobson.Jeremy Hobson: If I'm a bank, why in the world would I want to lend to you right now? I'm cash-trapped, and with the economy heading into a recession, you may be too. Sorry to say this, but just the thought of giving you a loan frightens me.
Alan Blinder: That sort of fear will always drive up any interest rate, including a mortgage rate.
Princeton economist Alan Blinder says the fear of default is the number-one reason why the Federal Reserve isn't having a big impact on fixed-rate mortgages. Number two, says economist Morris Davis at the University of Wisconsin, is that the Fed's rate cuts are bound to reverse as the economy turns around.
Morris Davis: In, say, two years' time, we're no longer going to be in a recession. And then the Federal Reserve Board should start raising interest rates.
So, he says banks have no interest in getting people into loans that could last 30 years at low, low interest rates. That said, the rates on some shorter-term loans do correlate more with the federal funds rate -- things like home equity loans and some adjustable rate mortgages. But, says Delores Conway at the University of Southern California's Lusk Center for Real Estate:
Delores Conway: The Fed is not really lowering interest rates just so that mortgage rates can go down and people can either stay in their homes or buy homes... They actually have the interest of the broader economy at heart.
In other words, with unemployment rising, a spreading credit crunch and growing concerns about inflation, the Fed now has bigger things to worry about than your monthly mortgage payments.
In Washington, I'm Jeremy Hobson for Marketplace.
