Mortgage Rate Disconnect

Dropping Mortgage Rates
Still "Artificially" High

Where should mortgage rates be right now? If historical relationships held, the rate on a 30 year mortgage would be 3.5%(!).

No, that's not a typo; going back a decade or more, long-term mortgages cost typically cost about 150 basis points more than the 10 year U.S. Treasury Bond yield. The yield on the latter now is barely over 2%.

An increasing number of commentators are joining the camp -- I've long been in it -- that closing that gap would do much to staunch the bleeding in the national housing market. In turn, stabilizing housing would do wonders for the broader economy.

In his blog post today, "Mortgage rates are still too high," economist and New York Times columnist Paul Krugman is only the latest to emphasize this link:

http://krugman.blogs.nytimes.com/2008/12/26/mortgage-rates-are-still-too-high/?hp

Lower rates have two, huge benefits: 1) they instantly increase prospective home buyers' purchasing power; and 2) they allow millions of existing homeowners to refinance, lowering their monthly payments and freeing up money for other things (like food, gas, and utility bills!).

The problem with mortgage rates, like almost everything else related to the credit markets, is that normal market mechanisms aren't working now. Instead, through its web of guarantees, bailouts, and cash infusions, the federal government is essentially deciding who can borrow, who can lend, and at what rates.

In such a command-and-control environment, the price of virtually everything credit-related could be said to be "artificial" (government-set), vs. market-determined.

If that's the case, Washington might as well "go all in" and make life easier for millions of American consumers -- not just Wall Street investment banks, too-big-to-fail insurers, automakers, etc.