Yesterday the San Fransisco Fed released a research paper authored by Glenn D. Rudebusch of which the crux was the target Fed Funds rate should be zero through 2012. It's actually more complicated than that. To get to zero the Fed would actually have to go to a negative 5 percent to offset the Fed's holding of mortgage assets that yield 3%, to net a Fed Funds rate of 0%.
You can read the whole paper here.
So we know what the Fed is going to do...but what impact will that have on the housing and mortgage market?
I'll tell you.
The impact of these low interest rates in the short run will spur/stabilize housing demand/prices. For all of us, this is a good thing.
The big question is what, if any, negative is impact over the long run will a prolonged period of low or zero interest rates?
Mr. Rudebusch points to Japan to deflect worries about a hyper-inflationary period following a prolonged period of zero rates. Of course, he's right, but the US is NOT Japan....especially when it comes to housing.
For example, the "typical" mortgage in the US is a 30 year mortgage, but in Japan it is a multi-generational 100 year mortgage. Think about that. When you buy a house in Japan, you indebted your son and possibly your grandson. Yikes!
Who wants to borrow money under those conditions even if the rate is just above zero? It's no wonder the Japanese housing market and economy in general is still recovery from their recession 15 years ago even though rates have been zero the entire time.
US home buyers don't have that hanging over their head when they go to borrow mortgage money.
To conclude, my belief after reading the paper is, at least, the Fed feels they can keep rates at zero for another 2 plus years and mitigate the hype-inflation period most forecasters feel is a foregone conclusion.
I wish them luck.
;)
;)
;)
