The dark side of lowering mortgage rates

The real estate industry is cheering this week's rate cut by the Federal Reserve, a cut that will lower the cost of mortgages.

An editorial this week in the Wall Street Journal spells out why easy money is often a deal with the devil.

In a nutshell, easy money kills the dollar. It makes imports more expensive since companies have to convert those weaker dollars into foreign currencies to buy overseas stuff. It jacks up the price of oil and gold, commodities whose international price is set in dollars.

In other words, our monthly house payment may be lower. But are we saving that much after accounting for higher gas prices and the added cost of all those Toyotas, French wines, Chinese flat screen TVs and plastic toys?

Here's a snippet from the Journal:

"The housing recession has caused the overall economy to slow, and recession worries are rampant. Many on Wall Street want their bubble back, and they are begging the Fed to reflate. But inflation also remains near the upper limit of the Fed's comfort level, the dollar is weak, gold is back above $700 and oil briefly popped above $80 a barrel last week.

For those of us who remember the economics of the 1970s, one abiding lesson is that trouble comes when the Fed is asked to spur economic growth. The job of a central bank is price stability. The Reagan-Paul Volcker policy mix was tight money combined with tax cutting, which reversed the 1970s' mix of easy money and tax increases. Washington is in danger of drifting back, almost unconsciously, to that 1970s' policy."

Comments

[Jonathan Roy]

Sadly, the federal reserve has almost no effect on fixed rate long-term mortgages. A nice chart is over at http://library.hsh.com/?row_id=91.

30-yr rates were in the low 6%s when they raised the funds rate to 1.25% a few years back. 30-yr rates are still in the low 6%s today (at 4.75% fed rate).