Mortgage rates hit sub 4% in the US and Japan

September 28, 2011

What a battle between inflationary trends and deflationary trends. Sub-4% mortgage rates have the potential to positively impact the economy. There are two impacts. The first, and most important, is the cash flow impact. Households are provided the opportunity to cut payments by some 15%-30%. Many households will re-term a 30-yr mortgage from 20, 22, 25 years back out to 30 years which further reduces monthly payments. In an environment where there is very limited net new job creation and limited scope for pay increases, this is quite meaningful to the average household. Obama has been pushing the HARP program to facilitate refinancing approval. I believe there is the potential for lower mortgage rates to impact the economy more than many economists expect.

The second impact is through improving the affordability of housing you increase the value of the housing stock. The wealth effect from housing will play out slowly and over many years. Moreover, even if lower mortgage rates simply get house prices flat, this is a very good thing from a household net worth standpoint relative to 3-4% declines which Case Schiller says we are running at today. Remember many households are leveraged to the value of their home, so 3% house price declines can mean anywhere from a 6%-30% hit to housing related equity (the nest egg).

Of course the same dynamics would be a positive for Japan, a country which has even more issues creating new jobs and income growth for younger workers.

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