The math of “real mortgage rates” – Schwab.com


From Liz Ann Sonders @ Schwab.com:

The math of “real mortgage rates”

Back at the peak of the housing bubble in 2005, the 30-year fixed mortgage rate (the nominal rate) was about 6%. To get the “real” mortgage rate, you have to subtract the appreciation in home prices (the “deflator”). Home prices were appreciating at a 17% annual rate at the bubble’s peak. So, the real mortgage rate was actually -11%: 6% – 17% = (11%). No wonder we had a bubble … who wouldn’t want to borrow at negative rates? You could borrow at 6% to buy an asset appreciating at 17% per year.

Fast-forward to the trough in housing in 2009. The nominal 30-year fixed mortgage rate had dropped to 5%, but home price appreciation became depreciation at an ironic 17% rate. So, the real mortgage rate was actually +22%: 5% – (17%) = 22%. Who wants to borrow at any rate to buy a rapidly depreciating asset?

I think this is what many policy makers are missing. It’s the “rapidly depreciating” part of the equation that needs to heal. If home prices are still declining, even with rates low, there’s likely to be limited demand to borrow.

Read more.

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This entry was posted in Debt Default/Restructuring, Debt Forgiveness / Personal Bankruptcy, Economy, Housing Bubble and tagged , , , , , . Bookmark the permalink.

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