Low Mortgage Rates: Protection Against Double-Dip Recession?
That's the thinking at Morgan Stanley, where economists have published research arguing, among others things, that rock-bottom mortgage rates are helping the US economy avoid a double-dip recession.
In the report, Richard Berner and David Greenlaw acknowledge that the U.S. economy continues to face significant risks, such as potential spillover from Europe's sovereign debt crisis and a slowdown of housing demand after expiration of the homebuyer tax credit.
But they argue that the recent wave of refinancings, along with other factors such as lower energy costs, should offset any negatives.
"The dip in conventional 30-year mortgage rates to about 4.8 percent has triggered a minor refinancing boom," they write. "Reduced debt service will further add to discretionary spending power for many mortgage borrowers."
In plain English: Less money spent on servicing your mortgage is more money to spend on goods and services, such as sandals, pedicures and Lady Gaga's used jewelry. This spending goes straight to business' bottom lines, which then makes them more likely to hire. And that, in short, is how you fuel economic growth.
Unfortunately, not many economists agree with the premise.
Celia Chen, senior director at Moody's Economy.com, argues that the refinancing wave hasn't been that significant. Many homeowners simply aren't able to refinance because they have negative equity in their homes, she tells AOL HousingWatch.
While in the past, refinancings boosted consumer spending when homeowners were able to cash out some of their equity. But again, since many have negative equity, cashing out isn't possible right now.
"It's positive for the economy when people are able to refinance and use some of that to spend on consumption," Chen says. "But I don't see that impact being that large right now."
Jeff Rosen, economist at Briefing.com, makes another interesting observation: In this tight lending climate, the only people able to refinance are those with excellent credit. That means they are getting pretty low mortgage rates, which in turn means that lenders aren't making much of a profit off the loans. This lost profit, in turn, means that banks have less cash at their disposal to use for other things that might fuel economic growth.
I'm not sure if I buy that argument, since banks seem to have enough cash right now, which they're not putting to much good use.
But I do get Rosen and Chen's point: The refinancings are just a slight breeze compared to the big winds buffeting the economy every which way.