August is the time for the summer doldrums, when market activity slows, people take vacations and, in the mortgage business at least, gear up for a busy fall conference season.
Not this year! The stock market last week was showing extreme volatility (meaning no one really knows what is going to happen), the country saw its credit rating downgraded (but ask yourself, how did Standard & Poor's do with the subprime mortgage market?) and the Federal Reserve announced it will continue to ease on down the road by keeping rates at nearly zero.
The 10-year Treasury yield last week was testing new all-time lows as the rush out of the stock market benefited the bond market. Will mortgage rates move in tandem as they usually do? The first indication is yes.
So that is some solid news as to where mortgage conditions will be for the next couple of years, an enormously long period to take the guesswork out of interest rate predictions.
However, the mortgage originations market has softened over the last two years, despite highly favorable rates. People worried about their jobs are not easily persuaded to make big-ticket purchases. So in and of itself low rates may not cause a market boom (many people have already refinanced to extremely low interest rates).
Something else is necessary to guarantee a robust mortgage market this year and next. It could be a number of things. One that would be extremely helpful would be a return of the mortgage tax credit which prevented the industry from going over the cliff in 2009 in the wake of the market meltdown.
Housing activity stimulates many, many other industries: Realtors and homebuilders most obviously, but also Wall Street, home improvement retailers, title insurers, mortgage insurers, construction workers and many others. An investment in housing would send ripple effects that could right an economy teetering on the brink of a double dip recession.
Homebuilders have been particularly hurt as the new home market has melted away. A $10,000 tax credit for new home purchases would be helpful there, with $7,500 for existing home sales.
Yes, this would add modestly to the deficit. Deficit reduction is a great goal, but it shouldn't be done until the economy is firmly back on its feet. Then, deficit and debt reduction should be pursued vigorously.
