May 10th, 2011

Why mortgage rates are still so low

by Peter Miller


falling ratesDo you remember when the recession ended? That would be in June 2009, at least according to the National Bureau of Economic Research.

Still waiting on things to get better

When recessions end the reasonable expectation is that things will get better. That has certainly been true for some sectors of the economy, say large financial institutions and major oil companies, but not for all.

Another expected byproduct of better times should be higher interest rates. After all, in an expanding economy there should be more competition for dollars as companies expand, so mortgage rates and other financing costs should trend higher.

Given this background it’s surprising that mortgage quotes remain around 5 percent. This is good news for those who want to buy property or refinance, but in a broader sense perhaps the news is not so good.

Less demand=lower mortgage rates

“Declining home prices and a high level of foreclosures continue to affect housing tenure decisions,” said Frank Nothaft, Freddie Mac’s chief economist. “Between the third quarter of last year and the first quarter of 2011, the housing stock experienced a decline of nearly 400,000 homeowners on net, according to the Census Bureau. However, the National Association of Realtors reported that during the same period there were almost 700,000 first-time homebuyers, which suggests gross losses may have been closer to 1.1 million homeowners over the October-through-March timeframe.”

So if there are 1.1 million fewer households seeking mortgage loans, then we have less demand and therefore little leverage to push up mortgage rates.

Low mortgage rates can only do so much

Low mortgage rates should be a marketplace stimulus, but to take advantage of such interest levels, borrowers need to have jobs, steady income and robust savings. In too many cases, that’s not the reality.

In the past few years, millions of homeowners have been foreclosed on. The end result is that we now have a large population of people who are effectively excluded from the housing market for the next five years or so. Although these people have been foreclosed on, their old homes continue to exist and they must still live somewhere. In addition, we have millions more who have not seen a pay increase in either real or cash terms and thus cannot act on today’s low mortgage rates.

Meanwhile, the federal funds rate–the rate banks charge each other for overnight loans–is at between 0 percent and 0.25 percent, while the discount rate–the rate banks are charged to borrow from the Federal Reserve–is at 0.75 percent.

Businesses not expanding, few jobs being created

In other words, there are huge amounts of cash available for expansion and development, but businesses either are not getting the money or are electing not to spend on expansion. The result is that unemployment remains stubbornly high and home prices remain stubbornly low.

An interesting example of this lack of expansion concerns the company 3M. Earlier this year, the company announced that the best possible use of $7 billion was to buy back its own stock:

“Today’s announcement reflects the strength of our business model and our confidence in the future,” said George W. Buckley, 3M chairman, president and CEO. “Our strong balance sheet and outstanding free cash flow allow us to fund growth investments and continue our legacy of returning significant cash to shareholders.”

Over the past five years, says the company, 3M “has returned over $15 billion to shareholders through a combination of dividends and share repurchases. 3M has paid dividends to its shareholders without interruption for more than 94 years.”

But about that $7 billion: there’s no research, no factory expansion within the U.S., no acquisitions, and no additional marketing which represents a better use of all this money?

How about taking $500 million–a pittance–and starting a job-creating, energy-efficient home builder using 3M products? Or how about spending $1 billion to extend low-rate mortgages to all 3M’s U.S. employees, even those who don’t get executive bonuses? Or $2 billion to winterize 80,000 Minnesota homes so thousands of local workers could be employed?

So yes, the recession may be officially over–but certainly not for everyone. And that’s one important reason why mortgage rates remain so low.

Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site,

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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