Addicted to (Spoiled By?) Ultra-Low Interest Rates
Two years ago, when the shortage of housing inventory in the Twin Cities first became apparent, the leading theory was that underwater homeowners literally couldn’t afford to sell.*
Now that local housing prices have rebounded significantly, that theory . . . umm, holds less water.
With current Twin Cities housing inventory the tightest it’s been in 20+ years — a meager 13,000 units for sale, vs. almost 40,000 in 2006 — what other explanations are there?
Stuck in Place — But Now For a Different Reason
Prudential agent (and fellow blogger) John Murphy believes (and I agree) that many homeowners are effectively locked in place by ultra-low interest rates, courtesy of the Federal Reserve.
Specifically, legions of homeowners in the Twin Cities and nationally have successively refinanced, taking 
advantage of interest rates that got as low as 3.25% for fixed, 30-year mortgages.
Even though rates are still historically affordable (just over 4%), moving now means giving up that locked-in, unbelievably low rate — and the dirt-cheap monthly payment that goes with it.
Interest Rate Inertia
That’s especially so given that people typically move to a bigger, nicer (read, more expensive) home.
That means coming up with a downpayment for said home — still a challenge for many equity-poor homeowners who bought near the market peak.
Step #2?
Prepping their current home for sale — something that could easily require $5k – $20k or more, depending on the home’s size, condition and price point.
Thanks, but no thanks.
How’s that for unintended side effects, Alan/Ben/Janet?**
Cash Flow Consequences & Policy Implications
On the plus side, all those people not moving have great cash flow, which presumably pops up somewhere else in the economy (maybe that’s where all the demand for Facebook and Google stock is coming from?!?).
As far as policy implications, I see two: 1) if you want to help the housing market, figure out how to make mortgages portable — a tall order, given that the collateral for a mortgage is the opposite of portable (note: many FHA mortgages are now assignable — but that’s not the same thing); and 2) focus any prospective, housing-related financial relief on helping people come up with downpayments.
*A homeowner is said to be “underwater” when they owe more than their home is currently worth. Sellers in such a situation either need to come to closing with a check for the shortfall, or, convince their bank(s) to accept less than 100¢ on the $1 — a process called a “short sale.”
**Alan Greenspan, Ben Bernanke, and Janet Yellen are the three most recent Federal Reserve Chair’s, all of whom endorsed the idea of driving interest rates into the ground to revive the economy.
Ms. Yellen’s chief task now is how to let interest rates rise without stunting the economy, a policy called “tapering.”
