Cut mortgage rates to build economy
President Obama's stimulus package is full of lots of proposals to boost our economy. Commentator R. Glenn Hubbard says one cost-effective and easy way to lead us to recovery is lowering mortgage rates.
R. Glenn Hubbard (R. Glenn Hubbard)
More on Housing - Real Estate, Commentaries, America's Financial Crisis
TEXT OF COMMENTARY
BOB MOON: North Dakota Democrat Kent Conrad is the chairman of the Senate Budget Committee. The lawmakers who've been drafting that bill agreed last night to hand home buyers a tax break of up to $15,000. The cost of that add-on pushes the Senate version of the stimulus package to well above $900 billion.
Commentator R. Glenn Hubbard would like to see them go even further, with a plan he's been pushing to have the government subsidize mortgage rates. Mr. Hubbard argues that since housing is what got us into this mess, it just may be the most effective way to turn things around.
GLENN HUBBARD: President Obama is right to stress the need for a stimulus package to build a foundation for economic recovery. But the biggest bang for the buck lies in housing, the epicenter of the financial crisis.
The government can increase housing demand, house prices and consumer spending with one policy change -- by lowering mortgage rates. And it can do so with little cost to taxpayers. Here's how:
Remember that the government controls the mortgage market through its conservatorship of Fannie Mae and Freddie Mac. So the Treasury could issue bonds and fund the housing agencies. Their lower costs of funds would enable lower mortgage rates. How much lower? Say, 4 percent on a 30-year fixed-rate mortgage. A lower rate would still allow an ample spread to compensate for default risk, prepayment risk, and underwriting costs.
Current futures markets suggest that house prices will fall by at least 12 percent in the next 18 months. But lower mortgage rates would put a floor under falling house prices by increasing housing demand and raising house values.
Since Americans spend about 5 percent of home equity on consumer goods and services each year, increasing housing values by as little as 10 percent could raise consumer spending by about $100 billion per year.
And, if refinancings at the new lower rate were permitted, millions of middle-income Americans would receive a tax cut averaging $400 per month. Unlike a one-time rebate, this reduction in mortgage payments would be permanent, and a much greater spur to consumption.
This raises a bigger question: Given the chaos of the recent past, wouldn't a return to simple, long-term fixed-rate mortgages with a low rate be right for the long-term future? Such simplicity could limit the chance of a future mortgage crisis.
Certainly for now, the best foundation for stimulus and recovery is a house -- or at least a new mortgage.
MOON: R. Glenn Hubbard is dean of the Graduate School of Business at Columbia University.
Comments
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From Moscow, ID, 02/12/2009
Please note that Professor Joseph Stiglitz (Also from Columbia) has suggested substituting a refundable tax credit for mortgage interest deductions. I have written a short piece putting specifics to his suggestions. Stiglitz proposal is simpler, easier, and requires far fewer changes than Professor Hubbard's proposal.
From Los Angeles, CA, 02/09/2009
I'm in disbelieve every time I hear an economist or politician suggest that putting a floor on the housing prices will help solve our economic troubles. The part that I find most disturbing is the suggestion that is possible to put a floor on house prices. As long as the house prices are not aligned with household incomes, people will not be able to buy homes. The only reason house prices were inflated in previous years was because people were tricked into believing they could afford those huge mortgages. I think everyone is smarter about that now. At least I hope we are. They can lower interest rates and give purchase incentives, but it the house prices are still inflated, no one will buy. And finding out if the prices are still inflated is not that difficult. There is plenty of information out there to figure that out (Case-Shiller home price index, and more) I think there is a huge detachment from reality of these folks that make these suggestions about putting a floor on the house prices. They live in a world with a different reality and don't realize how strained people's budgets already are, and how much worst it will get with all these layoffs. They can lower rates and give incentives but if the prices don't go down to what they should be for normal people to afford them, no one will buy. Besides, haven't we learned anything about the complexity of this world economy. I'm just perplexed that there are these people out there that still want to simplify the solution to our complex economy woes to "the housing market" We are NOT in a downward spiral because people are just loosing their homes. We are in this mess bc people were tricked into a false sense of wealth that sustained frivolous spending during the last few years. Now that reality has caught up to everyone, everything needs to adjust to the cold reality of what we can REALLY afford.
I don't know if the stimulus plan is a good idea or not and I, of course don't know the solution to our economic problems, but I can certainly tell you that even after already being pre-qualified for a home loan, I will not buy until I feel that the value of the home is somewhat aligned with incomes in my area. I don't care how many incentives they throw at me.
From Fremont, CA, 02/08/2009
I bit on more than I could chew but I sincerely paid off a big chunk of my mortgage working >80hrs/week. Now that my house costs less than the foreclosed home next to me. Why not give me the benefit of a lower rate than the sleaze ball who invested into 5 investor homes and is getting a good deal?
Can someone explain??
From Walpole, NH, 02/06/2009
Mr. Hubbard proposes that mortgage rates be lowered so that housing prices will stop falling. However, during the bubble of the past several years, housing prices shot up far past their historical relationship to income. This is one of the reasons so many people are so far in debt. Housing prices need to fall until they are once again aligned with income levels - a point made by a few others who submitted comments. That will help the economy more in the long run than many other attempts at stimulus. The fact that so few commentators & almost no politicians recognize this is driving me NUTS.
02/06/2009
Some peopel think falling hosue prices is the problem. It is not. They are just ADJUSTING to a level where the incomes can support. The problem was the house prices went up (another word bubble) and there was a disconnect from incomes. What this guy is suggesting is to create another bubble, by lowering the interest rates. Unfortunately people like this guy are running Federal reserve, Treasury.
Just think about this: Until 1998 bubbles were VERY RARE. But people like Hubbard (Federal reserve) managed to create 2 MASSIVE bubbles in a span of 8 years. That is very remarkable feat. Now being in bubble is real economy. That is what Hubbard is saying. Cut rates and create another bubble.
Whan economists say deflation, they are not referring to CPI. They are referring asset price deflation. In another words deflation means bursting of bubble. And they dont want that. They want bubble economy and they want bubble to become bigger, because there is no real productivity in the economy. It is based on people buying things (saving is bad, spending is good), flip houses, financial services (creadit swap defaults, packaging mortgage backed assets) etc. I am not saying there is no real economy. But majority of this economy is based above activities. These economists want to support these activities.
When housing prices were going up at unsustained levels, where were these economists. Did they sound alarm. No? For them it is the real economy.
My stand is tax payers shouldnt be funding the bubbles.
From San Jose, CA, 02/06/2009
OK, one more time now:
The problem is not that house prices are falling.
The problem is that house prices are still, in most places, way too expensive.
Government intervention to prop up house prices (absurdly low interest rates) is what got us into this mess; it certainly won't get us out.
I know it's a tired cliche at this point, but if low energy, food, and durable goods prices are good for consumers, why are lower housing costs bad?
The amount of money and energy being spent trying to find a way to prop up current absurd housing prices is, well, absurd itself. Housing prices need to drop levels that more or less align with historical price/income data, so that people can once again aford homes without requiring the kinky lending products that banks pushed relentlessly during the bubble.
From Gloucester, MA, 02/06/2009
I think this idea is a good one. For all the people complaining that this would not be a magic bullet and would not fix the joblessness problem, you are correct. But systematically lowering the mortgage rates *as part of an overall plan that includes other components* would certainly help address at least part of our problems. There is no ONE solution. Tax cuts clearly aren't the answer, either. We need a multi-pronged approach. If I get a 4% mortgage rate as one of those prongs, then GREAT!
From MI, 02/06/2009
I can't believe how idiotic this whole thing is becoming. The spin doctors are extremely well versed and we're so stupid to be biting on all of it.
Firstly, let's understand one thing...inflation of home values to their 'pre-bubble-burst' was sustained by Federal Reserve lending rates and the lenders...aka...Banks benefited greatly from that. Let's see...hmmm...make 5% on $200K, or 5% on $400K...no, no...let's make 5% on $600K. The banks were and still are making money hand over fist on the fact that the home values inflated to unsustainable levels. It's preposterous to think that a 2500 sf home is worth $500K! Give me a break!
The problem is, we all bought into it...because we felt that the 'increased' value of our homes was a great investment. My Dad always taught me that your home is not your investment...it is simply your home. You're not rich from your home...you are rich by saving and investing 'wisely' outside of your home. But we are a greedy lot...we like to think that as the values increased...we were better off...but we were WORSE off! As the prices rose...so did the interest payments.
Don't be stupid! Let the prices DEVALUE...let the market correct...and in 5-10 years we will all look back on this as one of the most valuable lessens that we've ever had!
The banks want nothing to do with deflated prices...they want interest rates to drop so that the prices can be kept high.
The best thing that can be done...is let everyone take their lumps and move on. Let the prices fall...and come back to reality! It is inevitable that this is what's going to happen anyhow.
People shouldn't be able to walk away from their debt obligations and because of that...this recession is going to hurt for quite some time. Don't make me pay for everyone's greed. I've been through this before (Canada 1989-1997) where I lost 35% of the value of my home after only having 25% equity in it. Took 9 years for the loss to come in at 15%...so I still lost.
That's the name of the game...
From Baltimore, MD, 02/06/2009
Glen Hubbard's proposal has even more benefits than he suggests. The banks are now holding complex financial assets are often referred to as �toxic assets,� a more appropriate name for these assets is �inscrutable assets.� The financial industry has found a way to create an asset that is so complex that it is almost impossible to untangle the assets and determine their value. We need to eliminate or at least reduce the amount of these assets in the system without creating new problems. Glen Hubbard's idea is has a good idea but it is important that it include refinancing of existing mortgages. If the plan included refinancing, then anyone with proper credit and enough equity in their home could refinance their mortgage at a low interest rate. If interest rates were low enough, then almost everyone with proper credit would want to refinance. This would greatly reduce the size of these inscrutable assets and reduce the problems these are causing on bank balance sheets. This would, perhaps, be a better way of dealing with these problems than nationalizing the banks or setting up bad banks to take these assets.
From Alameda, CA, 02/06/2009
Mr. Hubbard seems to be aloof like the majority of "economists" I've heard in recent months. All I've heard for almost a year now is of countless plans, ideas, and ways in which to save the housing market.
They are missing the point and need to think of the problem on an extremely fundamental level. Mr. Hubbard is correct that housing is at the epicenter of the crisis. But the reason it did so was simply because the prices became grossly detached from real incomes. Furthermore, the last 3 to 4 years of the housing boom generated appreciation reliant on toxic loan products.
Sitting back and digesting the events of the last several years, its plain to see that housing prices not only will continue to fall, but MUST fall back to levels that real incomes actually support. For example, I live in an East Bay town outside of San Francisco. Despite having a median area family income of around $75,000, the avg. price for a home here is still close to $600,000. The prices have fallen somewhat but still remain out of reach for the majority. The correction in my opinion still have a long ways to go.
I'll even take this one step further. The line of thinking from people like Mr. Hubbard is that the US economy is based on selling houses to one another. That's the problem. We can't exist in an economy that doesn't rely on actual productivity. We need to step back from this line of thinking and learn how to make money again instead of counting on home appreciation instead.
Bottom line: in trying to stop what I see as a positive event- the correction of housing prices- you're only putting off the inevitable. If home prices came back to levels that everyday people making regular wages could afford, then the reality is that there would be a return of stability versus rampant cycles of booms and busts with young families getting priced out of markets and homeowners going bankrupt from heavy mortgages and defaults.
02/06/2009
It has been said that economists are not a passonate bunch. But Mr. Hubbard's and Mr. Frum's passion for the failed prescriptions of Reaganomics woudl make a libertine blush. Nothing dims their passion, including reality.
While the Onion's headline may have said it best, "Recession Plagued Nation Demands New Bubble to Invest In", Mr. Hubbard gladly obliges. Create a new real estate bubble and all will be well.
Really? The Wall Street Journal, that socialist rag, debunks this myth neatly. See http://online.wsj.com/article/SB123380033980550585.html
The ground has shifted under your feet Mr. Hubbard. Either move with it or be swallowed up in the abyss. Just don't take us with you.
02/05/2009
Forget giving everybody free house and mailing checks. Construct lot of labor camps and lets build monuments, like egyptians built those pyramids. That would atleast leave something for future generations, instead of giving them bus load of debt.
02/05/2009
Forget interest rates. Forget principal. The government should just give everyone a house, that would solve all the economic problems. Forget unemployment too, the government can just mail every household a check once a month. Then there would be full employment and everyone would have a place to live. Simple.
From CA, 02/05/2009
Is this guy stupid or incompetent? How did this guy even become dean of a big business school. Why should govt fund another bubble. Why should tax payers fund another bubble? The difference between 4% and market rate has to borne by somebody, and this guy says no cost tax payers. Bizzaro world!!!
From New York, NY, 02/05/2009
I have a better idea. Study it carefully and pass it to the senators.
1.) Reduce the mortgage rate for all of the us home owners to 0 % for next three (or five) years. Keep the total payment same and have the whole amount (Pricipal + Interest) applied to the loan.
2.) This will allow everyone to build the equity in their houses. Banks balance sheet automatically looks better.
3.) Since current tax code allows home owner to deduct the interest against their FICA (Fed. Tax), there won't be deduction, so goverment get to keep the tax it has collected.
NO COST TO the GOVERNMENT!
From Olathe, KS, 02/05/2009
This is a great idea. Why not? The government of "change" has already promised new job creation. They also have some great swamp land in Florida they'd like to sell you. Seriously, what we see in Kansas is that mortgage rates fell in December when the banking industry was below water and then the talk of passing laws to help them out caused them to raise the rates because now they are doing great again. They didn't have to kowtow to the customer like any other business losing money because they got bailed out by magic and not hard work and lowering rates to attract customers the old fashioined way. Let's lower all the mortage rates. It can only be win win.
From North Augusta, SC, 02/05/2009
Lowering mortgage rates will certainly help the economy. Well-qualified home buyers will be the ones to get loans, due to the much more stringent qualifications now needed to even get a mortgage in the first place. The free-for-all on home lending to unqualified or barely qualified buyers that we saw a few years ago is over. Also, those of us who own homes and have a desire to refinance to do home maintenance and improvements can do so at a great lower rate. That will also help stimulate the economy. My husband and I have been sitting on our hands, waiting and watching for the rates to go down, and very soon we will be refinancing then turning around and putting the money back into our house. We think the possibility of 4% rates is great! We wholeheartedly believe in Mr. Hubbard's statement: "Certainly for now, the best foundation for stimulus and recovery is a house".
From South Miami, FL, 02/05/2009
I think that Dr. Hubbard's analysis is brilliant. Give three-quarters of the homeowners an extra $400 per month and what will they do with it? Most will spend it and that is what the economy need at this point. It would also put the banking industry over to the side because they would no longer be able to simply milk the public. They would still be in business, making loans and mortgages at a lower rate and thus making less money, but they put us in this mess in the first place so they need to feel a little pain about what they did.
I like it. Dr. Hubbard, keep developing this idea. Simple, straightforward, and get money to the most people in the shortest period of time. Go for it.
From Phoenix, AZ, 02/05/2009
From the article -
“And, if refinancings at the new lower rate were permitted, millions of middle-income Americans would receive a tax cut averaging $400 per month. Unlike a one-time rebate, this reduction in mortgage payments would be permanent, and a much greater spur to consumption.”
Don’t lose this paragraph because it alone can help the majority of Americans – Me
If I’m currently paying $923.58 a month for a 200K mortgage at 6.25% fixed for 30 years. And I can refinance my loan to 4.00% resulting in a 207.46 monthly savings. Count me in.
$923.58 - $716.12 = $207.46 (every month)
And I can right off the refinance costs the first year – Avg. $4000
This is better than any one time check I will use to pay down my credit card.
In one year I will have spent = $2489.52
In 3 years = $7468.56
I WILL spend this money.
And my spending will create & support jobs.
Please get this into the stimulus bill..
From Kissimmee, FL, 02/05/2009
In addition to low interest mortgages, why can't FANNIE MAE and FREDDIE MAC take the most toxin of their loans and convert them to fully assumable mortgages. The personal guarantees of most borrowers is unrealistic and and removing due on sale clauses could free up trillions of dollars without cost to the taxpayers.
From mansfield, TX, 02/05/2009
as an architect whose firm has specialized in residential architecture for 20 years, i heartily agree with mr. moon regarding the stimulation of the economy by subsidizing home mortgages. many current and former clients have indicated to me that were lower (and attainable) financing available, they would brave the current economy to purchase a new home- thus more jobs, and so on, and so on....
From The Colony, TX, 02/05/2009
I am not in either the real estate or financial business so I may be missing something here.
I don't understand how lowering interest rates or giving tax credits will induce people who don't have jobs, or are worried about losing their jobs, to buy houses?
Doesn't stable income precede a mortgage?
From New Bedford, MA, 02/05/2009
The problem with Dean Hubbard's analysis lays in his failure to realize that the market value of the nation's housing stock is mostly dependent on the level of personal income, and the application of an appropriate fraction to housing cost, say thirty-two percent. Lower interest rates will increase housing prices through leveraging the available income. When as now job losses have reduced the number of families with stable financeable income, lower mortgage rates cannot even fully revive housing markets let alone spur construction of new housing with the resulting creation of jobs.
We certainly should not depend on people borrowing against home values to finance current consumption. There is no reason that the "wealth effect" relationship Hubbard posits has survived the current crises intact.
Here is a comment I sent to Sen. Lamar Alexander after hearing his version of the "fix housing first" argument earlier this evening on NPR's All Things Considered.
Dear Sen. Alexander,
I just heard you interviewed on NPR's All Things Considered. I have sent the following comments to Senators Kennedy and Kerry. I have many years of experience in real estate finance and economics. I respectfully submit that "fixing housing first" while important for restoring consumer and financial market confidence has almost nothing to do with directly creating jobs. Housing construction will respond only after new housing demand is created by stable employment and increasing family incomes. These will depend on direct federal, state and hlocal government expenditures, renewed business confidence and financing, and to a much lesser extent on consumer expenditures stimulated by tax cuts. The leakage to foreign purchases and to savings and debt reduction are likely to make tax cuts a very ineffective stimulus for jobs and the economy.
I do appreciate your thoughtfullness and your effort to achieve an effective stimulus package in a timely fashion.
I am concerned that the proposed home purchase tax credit and mortgage interest rate subsidies will eliminate job creating expenditures from the stimulus bill. While stabilizing housing markets and related financing markets are important to restoring consumer confidence, they will not directly create many jobs.
Most housing markets are well supplied with product. Even if the excess or "overhang" of supply from unsold new, foreclosed, and distressed mortgagor houses is reduced by the credit and low cost financing, housing construction, which is what would create jobs, will likely respond very slowly and only where demographics and personal incomes can justify new production.
I believe most economists would agree that housing will not lead the economic recovery even if it was responsible for creating the problem. Note: This has little to do with the separate issues of helping people who are in financial distress avoid forecloser. That is not about stimulus and jobs creation.
From Fort Myers, FL, 02/05/2009
Sounds like Glenn Hubbard is well insulated from the real world in his position at Columbia. His theory that lowering mortgage rates will stimulate the economy sounds nice, but does he realize that you must have a JOB in order to qualify for a mortgage? The number of unemployed people hit a 26-year high yesterday and is expected to continue to climb.
In addition, many people (like me) who actually have jobs at the moment are losing their homes to foreclosure after months and months of unemployment during the last 18 months. I won't be able to qualify for a new mortgage for years, like millions of other people in the US.
I am sure Mr. Hubbard's idea is wonderful in theory, but I think in practice the only people who would get these new, low-rate mortgages are Columbia University deans and the like.
It breaks my heart that I no longer own my own home, and I would love nothing better than to be a home owner again. However, no one is going to give someone like me, with my current credit, one of these new, low-rate mortgages. No equity for me to spend, no $400 per month "savings."
From omaha, NE, 02/05/2009
With all due respect, this is the stupidiest of the dumb idea parade marching around Washington and, aparently, the business schools that turned out all those fancypants doing such a bang-up job on Wall Street. "The government can increase housing demand, house prices and consumer spending with one policy change -- by lowering mortgage rates." No kidding?! That's the problem -- not the solution. The Government already perverted decision making with cheap credit, crazy lending laws, and special privledges such as mortgage deductions. Don't they say that the definition of insanity is doing the same thing over and over again and expecting different results? Honestly, I think there is some bizarre conspiracy going on whereas every single politician and media outlet broadcasts nothing but crazy ignorance until we're all too exhausted to even care anymore. Sheesh.
02/05/2009
One problem I see with this idea is how many people have already defaulted, many due to no fault of their own; loss of job, loss of investment, loss of business. Many of these people will no longer have an excellent credit history, which all banks require as a minimum. What's worse is the sheer volume of people who will now be in a position that they have held for less than two years.
In order for this to work, the government needs to take credit reviews out of credit bureaus and handle it themselves for the duration of the recession. Leaving it to big business will result in continued greed and hoarding by these large institutions.
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