Why is everyone from the White House to Main Street rooting for lower mortgage rates?
Sure, individually speaking, cheaper financing improves a person’s ability to buy goods – including a home. That’s why people like President Donald Trump and numerous house hunters want the Federal Reserve to do what it can to nudge rates lower.
But history reveals a dark side to sliding rates: They typically come when the overall economy is suffering.
My trusty spreadsheet looked back to 1990 to see how annual swings in the 30-year mortgage rate, as tracked by Freddie Mac, meshed with home-price indexes from the Federal Housing Finance Agency and job counts from the Bureau of Labor Statistics.
When you rank the years by the change in mortgage rates and slice them into three groups, you see how mediocre the economy runs when rates are declining.
During the 12 years when mortgage rates had their biggest dips since 1990, these years had an average rate slide of 0.8 percentage points.
The big rate drops came as home-price gains averaged only 3% in California and nationwide.
Why so modest? Well, jobs – key to a house hunter’s willingness to buy – were falling at a 0.6% annual rate across California and 0.2% nationwide as rates tumbled.
Now compare those sour days with surging mortgage rates.
The 12 years when mortgages saw their biggest jumps saw rates average a 0.7-percentage-point increase.
In those years, California home prices jumped an average 10%. The nation saw 7% gains.
Again, eyeball employment.
Large rate hikes came as California bosses were boosting staffing at a 2.4% annual rate. Nationally, these same years saw 2.1% job growth.
When times are good and hiring is plentiful, folks are willing to pay up for many things – including housing and financing.
But when times are bad, and job cuts are frequent, folks need financing discounts. Falling mortgage rates signal economic distress.
Hopefully, the next chairman of the Federal Reserve understands this history lesson.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
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