USA Today tells us that James Lockhart, the head of the agency that oversees Fannie Mae and Freddie Mac, thinks that the Fed could push mortgage interest rates below 4.0 percent in order to boost home sales. Wow, what a fantastic idea!!!! Maybe, the Fed can even push mortgage rates down to 3.0 percent, that should really provide a boost to the housing market. If USA Today had talked to anyone who knows any economics, this person would have told them how ungodly stupid this plan is. We will not have 3.0 percent or even 4.0 percent mortgage rates forever. At some point, the economy will recover and we will see mortgage rates in a more normal 6.5 to 7.5 percent range. If these extraordinarily low rates helped to support prices now, then we should expect a subsequent collapse in prices when rates return to more normal levels. To put numbers here, let's assume that pushing mortgage rates down below 4.0 percent will raise prices to a level that is 15 percent higher than when rates are at more normal levels. That means that a person paying $200k for the median house can expect to see a loss of $30,000 when she sells it five years later in a more normal interest rate environment. For most families, $30,000 will be a very large chunk of their accumulated wealth. In other words, this would be a really big hit. Unfortunately, USA Today readers will for the most part not know about this side of the story because the paper only saw fit to present Mr. Lockhart's plan, not the views of anyone who considered the consequences of this proposal.
--Dean Baker
