Show of hands, now, how many of you have heard people complain that they want to buy a house but those darned interest rates are just too high?
I thought so.
The average rate on a 30-year mortgage right now is 3.6 percent. To
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put that in perspective, it was 6.1 percent back when real estate was going gangbusters in 2007, according to this story by Bloomberg Businessweek.
Combine that with house prices, which are much lower than in 2007, and we probably haven’t had such a good time to buy since your grandparents were looking for a nice place in the suburbs with a garage for their new ’57 Chevy.
All of which has me confused as to why the Fed, and its chairman Ben Bernanke, think they can move us to buy by pushing rates even lower.
On Thursday, the Fed announced it would begin buying mortgage-related debt to the tune of $40 billion a month until the economy begins to improve.
Investors immediately began buying mortgage bonds, which is bound to lower the yield. Expect interest rates to fall again.
The overriding goal of all this is to try to get the economy back to full employment. Without a job, you can’t afford a house at any price. But it’s impossible for the Fed to inject itself into the economy this way without creating winners and losers.
Oil markets liked the idea. The price of a barrel rose after the news, but the futures market fell. (Remember how futures investors once were the scapegoat for high gas prices?) Investors apparently think unrest in the Middle East and a drop in demand heading into the fall will keep prices from rising..
The stock market loved it. The Dow closed up 206.5 points.
The dollar didn’t like it. It fell to a seven-month low against the yen and a four-month low against the Euro.
If you were king for a day, what kinds of changes would you like to see in the economy? I’m guessing one of the things on your list might be higher interest rates on savings and investments.
Where is the incentive to put money into a bank savings account? Interest rates are so low you might as well use your mattress. The same goes for other savings instruments average people might use, such as CDs.
The Fed wants you to borrow and buy, not to save. But the lesson of the Great Recession was for average people not to over-extend themselves.
Experts are calling the Fed’s move aggressive and dramatic. It also seems pretty much like the last weapon in its arsenal. If cheap real estate at 1 or 2 percent interest doesn’t get the economy going or, worse, if it causes inflation, what then?