A psy-QE-logical problem

Posted by Tracy Alloway on Oct 01 15:14. 2 comments | Share

David Rosenberg thoughts on QE v2.0 are complex indeed.

Though he’s detailed at length why quantitative easing will flatten the yield curve —this time — he’s rather dubious of its actual effects on the US economy, at least in terms of mortgages.

In his Friday ‘Breakfast’ missive, the Gluskin Sheff analyst says:

New home sales are at their second lowest level on record despite record low 4% long-term mortgage rates. So if QE2 brings rates down to 3%, who cares? And with 11 million U.S. households upside down on their mortgages, refinancings have failed to boom and add cash flow to pocketbooks as was the case in 2003-04.

At the 2006 bubble peaks, households were engaging in mortgage equity cashouts to the tune of over $80 billion per quarter. That provided the thrust for the spending binge even as the jobs cycle lagged behind, similar to what we had seen in the past as the economy continued to adjust the vagaries of the post-dotcom bubble bust. Today, cash-out refinancing activity is running at one-tenth that good ol’ pace of five years ago. Indeed, attitudes towards “being in debt” have shifted so radically that nearly 1 in 4 households are now “cashing in” and paying down their mortgage debt. Nearly 1 in 3 upon refinancing are doing the most un-American thing of all; choosing to accelerate their paydown by reducing their amortization terms! This means maintaining or increasing the same monthly payments in a lower rate environment, which in turn helps explain why spending intentions on other things are going down. What can Dr. Bernanke do when the shift in attitudes is so profoundly psychological?

Right now debt is, quite simply, distasteful?

It’s certainly one way — together with tighter bank lending — to explain the breakdown in some of the historical associations between rates, refinancing and home sales in the below charts.

They — along with the extra commentary — come from RBC Capital Markets’ US economics team, led by Tom Porcelli.

Exhibit 1: We have been saying QE2 will have little impact on the economy aside from perhaps more refi activity. But an increase in refis and the commensurate savings would be a drop in the bucket. If the level of refi originations matched the all-time highs seen back in 2003 and mortgage rates fell another 50bps we would see an injection of $5bn to consumer pocketbooks in one year – or 0.05% of nominal PCE. Miniscule.

Exhibit 2: Furthermore, getting back to the record level of refi’s seems highly unlikely. Keep in mind that we’ve already seen rates fall 200bp from nearby highs (which is 2/3 the decline seen during the boom). The response to this decline in rates this time around has been muted thanks to, among other things, incredibly tight lending standards.

Exhibit 3: Low rates have done nothing to stimulate home sales and the relationship between mortgage rates and sales, since the bubble peaked in mid-2006 has decidedly broken down…

Exhibit 4: …those that say lower mortgage rates will motivate buyers clearly have not done their homework.

Over to you, Bernanke.

Related links:
Historic lows in mortgage rates fail to motivate buyers, owners – USA Today
Get ready, get set, deleverage! With one notable (US) exception - FT Alphaville
Quixotic QEasing - FT Alphaville