The patient isn't moving.
After years of record-low interest rates, a team of economists including JP Morgan's Michael Feroli and Bank of America's Ethan Harris now write that the housing market cannot and will not respond to defibrillation-through-monetary policy. [PDF]
In the good old days, lowering interest rates was supposed to stimulate borrowing for things — a house, for example.
But the housing market crash caused a blowout in the mortgage pipeline, and now banks are behaving like PTSD victims:
- Banks have jacked up credit standards to all-time highs
- Lender resources are being diverted to foreclosures and away from underwriting
- Homes are no longer seen as a reliable piece of collateral
As a result, there is now a huge gap between the interest rate the Fed can wrangle through monetary policy, and actual private borrowing rates offered by banks,
As the authors write, "the effective rates that borrowers can obtain may be significantly higher than the rates the Federal Reserve can affect."
Read the whole report at the University of Chicago's Booth School website.
Please follow Money Game on Twitter and Facebook.
Join the conversation about this story »
See Also:
- GARY SHILLING: Renters Will Dominate The Housing Market For Another 4 To 5 Years
- Are Rising Oil Prices About To Result In A Catastrophic Central Bank Blunder?
- FHFA House Price Index Jumps 0.7%