Pending Sales of U.S. Existing Homes Decline by Most in a Year

This is just another grim statistic that shows that while the recession might be over for the 1%, the rest of us are still deeply mired in it.

Lest anyone counter with they are the lowest they have ever been... in nominal terms that is true.

But if 3.9% was such a great mortgage rate then more people would be buying houses.

The Fed has been up against zero for ages now, but that doesn't mean the Fed rate is supposed to be zero. It is supposed to be about negative 4% but cannot be because it can't go below zero. (Meaning that in light of unemployment and GDP and inflation numbers the Fed would have cut an additional 4% if they had had it to cut.)

And that deforms all credit. All interest rates are about 4% higher than they should be.

The "fair" mortgage rate that would fix the housing market is about 0%. It can't happen, since no bank would lend at 0%, but that is what it would take.

Like having gotten recently burned in the housing market, or being unemployed, or underemployed, or having massive student debt. Mortgage rates is down towards the bottom of that list.

Furthermore, keeping those rates at an artificially low level is deforming the rest of the economy, slowing growth and recovery.

You are not the first person on the left I have seen make the claim that the US growth would benefit from higher interest rates.

Is there a name for that school of economic thought?

Krugman explains it better than I could, but then again he got a Nobel prize in economics.
http://www.nytimes.com/2012/04/06/opinion/krugman-not-enough-inflation.html

We do not have artificially low rates. They are actually artificially high because we are up against the zero-boundary. (Meaning that the Fed would, if not constrained by the zero boundary, be cutting rates. The economy warrants lower rates. They are just not possible.)

One of two reasons Krugman (and all right-thinking economists) want more inflation is because we cannot cut rates.

Real Interest Rate = (Nominal Rate - Inflation)

When the Fed is stuck at zero:

Real Interest Rate = (zero minus inflation)

Since we cannot increase monetary stimulus by cutting nominal rates any more the only way the Fed can cut rates is for there to be inflation while the Fed holds steady at zero. If the Fed stands pat then every increase in inflation is an effective decrease in interest rates.

Inflation re-empowers the Fed's stimulative powers, which have been out of stimulus bullets for years now.

Low rates do not restrain growth. Low growth restrains rates. If the economy recovers rates (and inflation) will increase, the those higher rates will be an effect of growth, not a cause of growth.

The other reason we need inflation is that we are deeply indebted and every tick up in inflation reduces the real cost of all fixed-rate debt. That's sad for banks but good for debtors, and stimulating debtors will benefit the economy more than swelling bank profit margins will.

Monetary stimulus has failed and will continue to fail.

Demand for loans and availability of creditworthy borrowers are what drive lending, not nominal interest rates.

The Fed has the power to control rates at any maturity. The Fed is not stuck at zero now and it can continue to control rates at the zero bound (see Japan).

The Fed is not out of bullets, it's just shooting blanks. See: "pushing on a string". Only fiscal policy can succeed now.

MadHound is the one who provided a link to the definitive enshrinement of neoclassical nonsense with some snark about how I should be reading Krugman so that "common sense" will illuminate me.

I then had to explain what Krugman was trying to say in hopes that MadHound would recognize that Krugman, being of the neoclassical nonsense school, is not likely to have ever given any support for the proposition that higher interest rates cause either inflation or growth (though the historical correlation of the two is plain).

You would just as sensibly tell MadHound that he or she is linking to neoclassical nonsense or go over to Krugman's blog and tell him that he is preaching neoclassical nonsense.

But since you are here... I remain curious where I could find a simple explanation of the theory in which low rates are restricting growth.

I do not believe they are but I was not born with any beliefs on the topic whatsoever, so obviously whatever I believe today was acquired, derived and reasoned, and that ongoing process has not finished so I am perfectly amenable to new ideas.

>The Fed is not out of bullets, it's just shooting blanks. See: "pushing on a string". Only fiscal policy can succeed now.

You are responding to a patient explanation of why pushing on a string does not work by repeating my conclusion as a stunning refutation of my conclusion?

Well. I stand corrected.

And if only fiscal policy can work (I agree) and the Fed is not out of bullets (I assume bullets are things of effect) then the Fed must have some ability to dictate and manifest fiscal policy... which would be awesome but it doesn't.

As for your theory that "Demand for loans and availability of creditworthy borrowers are what drive lending, not nominal interest rates."

Your thesis is: Price does not affect demand.

(Availability of creditworthy borrowers is part of demand so your statement only has two terms.)

Lowering mortgage rates to 0% would, in your framing not cause more purchases of houses. Would raising mortgages to 8% reduce purchases of houses? How about 300%/year mortgage interest? Any effect? Of course not.

Should Toyota stop offering 0% financing promotions since they cannot increase demand for Toyotas? The fact that sales of Toyotas always increase during 0% rate promotions must be a coincidence.

Does the price of a loan affect the number of creditworthy borrowers? A lot of people could service a 1% mortgage on a given property with ease but couldn't possibly service a 6% mortgage.

I give the credit of assuming you do not mean what you say.

...and that all of the tricks in the book can do little but keep us close to the limit. If there were no limit to resources then the classical economic theories would have more predictable results.

So I basically agree with your first line of reasoning - a 0% mortgage would be most fitting, given the long-term outlook for wage-growth and housing values, and the continued weakness in the housing market is best explained by the high cost of borrowing. Where there is no expectation of rising values, and growth is very slow, then everything else begins to look like risk.

(But not the words you attempted to write on my behalf.)

The Fed can lower rates all the way down to 0% if it likes, or it even create negative real rates. They are not "out of bullets" as you say. Bernanke is locked and loaded. Again, he's shooting blanks at this point.

By that I mean that the continued impact on demand for loans will be minimal, for precisely the reasons I stated. This isn't just a guess on my part, it is the actual reality that you and I and everyone else is currently living through. Witness the complete failure of QE, for instance. Japan represents another prominent example of the failure of identical monetary policies to generate significant borrower demand or credit expansion. You are promoting the neoclassical view that aggregate spending is extremely sensitive to changes in interest rates and only the cost of funds side is relevant. This is not a view shared by all neo-chartalists and post-Keynesians (Toyota promotions aside, of course).

There is disagreement amongst heterodox economists over the impact of targeting a higher rate, but my view is that the Fed should lift rates in absence of sound fiscal policy from Congress and the White House. My reasoning is twofold. First, I think the income side is an important consideration. A higher rate on bonds is net stimulative, providing a nice boost in income to savers and those on a fixed-income. Second, there is a positive psychological component to higher rates whereby savers spend more freely due to an increased sense of financial security. Failing proper government fiscal support, this is probably the best the Fed could do right now to encourage (non-speculative/non-financial) economic activity.

a presumption made and a judgement passed on you which colors every post made by a certain person lol

Or do you just operate on petty prejudice and emotional spasms, as in the post I am replying to?

I am on the left. It is hardly an insult.

When I say "I have seen more people who work in Washington D. C. wearing hats lately," do you assume that I do not work in Washington D. C.? Or that I despise hats?

Such an assumption might fulfill an emotional need but it isn't a reasonable way to think.

A "presumption"... do you think I have never read anything by the poster, or that the poster would be offended by the "presumption" that he is not a libertarian crack-pot or supply-side absolutist?

I was pretty clearly leaving aside economic gibberish from the right. (Unless one had an emotional need to avoid the obvious meaning in service of recreational paranoia.)

There are people on the right who do want to raise rates because they believe that our deficit spending must cause inflation in any circumstance and that rates must be raised to head off that imagined result.

The poster was suggesting that low rates are harmful, and I KNOW The poster is on the left side of the overall spectrum (as am I) and I was asking for what the reasoning for the position would be from a left perspective.

"a judgment passed on you"... no, there is not "judgment" in correctly identifying a person on Democratic fucking Underground as not being of the Right Wing. (And presumably not a judgment the poster would object to... there I go with the presumptions again.)

Un-fucking-believable.

ie unregulated insurance, that they don't have the assets to back up, destroying the economy and bringing tragedy to millions of homeowners THEN they could get 0% interest loans.

And car elevators.

or they are afraid they will lose their job.

If the prices drop then people who own homes will be underwater. If someone pays 10% for a $100k home and the new value is $80k they either take the loss (which dents their ability to buy a new house) or they ride it out until prices go back up in a decade or so.

at exactly the wrong time. We know and knew exactly where and how the money went and the very people that caused it, and extracted mind-boggling profits from it, were the only people that didn't and aren't paying it off. In fact, they got even more of our money.

This was possibly the greatest missed opportunity in history. Instead we got generational debt.

And we're supposed to be grateful for it.

My husband pretty much says the same thing (hint: he's not a Democrat).

especially when, my party doesn't.

they have been juggling multiple offers on homes, bidding wars, selling (non REO homes) at least 4 a week. Friends who are now looking for a home are being outbid by other buyers.

I think it is a case of a few certain markets being in the state you describe. I think overall, nation wide, we still have massive amounts of inventory to dispose of and that means more price declines. Also, the trend may be down, but like with every price trend in an asset class, we will get price spikes up short term, while the general price trend remains down long term. Better to buy on the dip and sell into one of these price spikes.

Another reason might be you are observing what is happening right now, and maybe the data is lagging a bit.

artificially high. The housing bubble has not been allowed to burst, but is rather deflating in slow motion. The bottom line is that it is foolish to buy into a depreciating "asset".

then more people would qualify for mortgages and would have the confidence to buy.

Allowing prices to finally collapse at this late date, after starving underemployed homeowners for 5 years, would precipitate a new disaster.

Had they allowed it to run its natural course in '08, many of us who prepared in advance would have been able to ride out the storm.

By propping up the banks for 4 years, dragging this out ad infinitum, at least some of us who tried to prepare for the coming storm are now on the brink. If they finally let it collapse now, people like me will go down for the final time.

Had they given a true stimulus, of the size recommended and in the best form (hint: not tax cuts) along with bailing out the banks (and jailing the banksters), then we would have inflation and be able to monetize the debt, but we would also have higher employment rates and the workers would be doing better.

Can't have that, though.