While many news outlets and pundits have been reporting on how historically low mortgage rates could spur housing demand, Charles Schwab’s Liz Ann Sonders says that they’re missing a big point.
In a Financial Times column, Sonders says that people always focus on the nominal mortgage rate. But, she says, there’s a “real rate” for mortgages, just as their is a “real rate” for gross domestic product. This real mortgage rate is the difference between the nominal mortgage rate and the rate at which home prices are appreciating or depreciating.
Using data from the National Association of Realtors, Sonders says, the real 30-year fixed mortgage rate at the height of the housing bubble in 2005 was negative 11% — that’s a 6% nominal rate, minus the 17% rate at whcih home prices were rising annually. “It is no wonder we had a bubble in real estate,” she writes. “Who wouldn’t want to borrow at negative interest rates? You could borrow at 6 per cent to buy an asset appreciating at a 17 per cent annual rate.”
In 2009, nominal mortgage rates were down to 5%, Sonders says, but home prices were depreciating at 17% annually. That makes for a whopping 22% real mortgage rate. Today, she says, the real rate is about 8% — that’s 4% for the nominal interest rate, and 4% annual depreciation.
All of this means that policies that drive nominal mortgage rates even further won’t make much of a difference if home prices continue to depreciate, Sonders says. “The nominal mortgage rate could drop even further, helped by the Federal Reserve’s Operation Twist, which is changing the holdings and maturity structure of the Fed’s balance sheet, and aims to bring down mortgage rates,” she writes. “But it is important to understand that unless the ‘still depreciating’ part of the equation is solved, you’d be hard-pressed to find a case for meaningfully better demand.”