Mortgage rates have hovered near 4.5 percent for weeks. If mortgage rates dropped even lower, would that compel you to buy a house?
Probably not, right? If you're looking for a house now, then mortgage rates are low enough. If you're not shopping for a house right now, high mortgage rates aren't the reason. Maybe you're satisfied with your living arrangements, or you're upside-down on your house, or you're waiting for house prices to fall even further.
Yesterday the Federal Reserve implied that it's ready to try another round of quantitative easing (dubbed "QE2" by some observers), a way of dumping money into the banking system to send long-term interest rates lower. I question the effectiveness of this. Few houses and cars are being sold, and I don't think buyers are shutting their checkbooks because interest rates are too high.
In my translation of what the Fed said, notice that the Fed mentioned the danger of deflation in two of the six paragraphs.
Paragraph 2 is entirely about the Fed's perception of the danger of falling prices. "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate."
My colleague Greg McBride noticed this emphasis on deflation, too.
Chairman Ben Bernanke is a scholar of the Great Depression, and he wants to avoid that era of falling prices. When prices fall, people wait to buy things. As people wait, producers and sellers lose jobs. With less money circulating in the economy, prices fall even more, and a vicious circle is created.
We already have deflation in housing, and home sales have plunged. If the Fed wants to spark the housing sector, forcing rates lower isn't the way to go. Instead, it might be more effective for the central bank to buy huge numbers of foreclosed houses at slightly elevated prices, igniting consumer demand. The Fed could sell the houses over the next decade and maybe even make a profit.
Not gonna happen, of course. But buying up empty houses would probably be more effective than quantitative easing.