1% Drop in Mortgage Rates = $118B Annual Savings
In a previous post, I estimated that for every one cent drop in retail gas prices, U.S. consumers and businesses save about $1.435 billion annually.
Following Morgan Stanley's David Greenlaw's analysis (today's WSJ), I estimate that for every one percent decrease in mortgage rates, mortgage holders as a group will save about $118 billion per year, assuming that everybody refinances to the lower rate.
Calculation: There is about $15 trillion of outstanding mortgage debt (Fed data here), and the average "effective rate of interest on mortgage debt outstanding" was 6.235% in 2008 (BEA data here), resulting in annual payment (principal and interest) of about $1.117 trillion. At a 5.235% interest rate (1% decrease), the annual payments would be just under $1 trillion, for a savings of $118 billion per year.
If mortgage interest rates fall to 4.5% (and everybody refinances), the potential annual savings for homeowners would be about $205 billion; and if mortgage rates fall to 4.25%, annual savings would be $234 billion.
Bottom Line: Following the $300 billion "energy tax cut" from falling gas and oil prices since last summer, there could be an additional "tax cut" coming this year from falling mortgage rates that could potentially save homeowners a hundred billion dollars per year or more.