Wednesday, March 18, 2009

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.

10 Comments:

At 3/19/2009 12:30 AM, Blogger das Kapitalist said...

That headline is a bit misleading. I was thinking, 1% has to save more than $118? Then I read the article and realized, oh he meant 118 billion.

 
At 3/19/2009 4:34 AM, Blogger OA said...

So the US is going to do what China did and buy Treasuries, keeping mortgage rates low for an "extended period". And the short end is going to be near zero rates.

And we'll come out of this great, just like the last time we saw this...

 
At 3/19/2009 6:47 AM, Blogger Mark J. Perry said...

das Kapitalist: Thanks, the headline should be "$118B," it's fixed now.

 
At 3/19/2009 7:21 AM, Anonymous J said...

So the answer to getting out of the current bust, is to create the next bubble. Wonderful.

 
At 3/19/2009 8:40 AM, Blogger David said...

Every dime of this $118 billion, of course, represents reduced income to direct or indirect holders of mortgages. (True, not all of these are in the U.S.)

 
At 3/19/2009 9:27 AM, Blogger Kelly D. Miller said...

The low lending standards contributed to the bubble bust more than low interest rates.

Will the banks learn the lesson?

They have certainly learned how to take taxpayers $

 
At 3/19/2009 11:20 AM, Anonymous Cromagnum said...

"What 118b in consumer savings?

Wait till I get my cap-n-trade crisis started. That will get that money back in my pocket quicker than you can say Socialist Succotash"

The Teleprompter Prez.

 
At 3/19/2009 11:46 AM, OpenID larriecampbell said...

But how many home owners can't refinance because they don't have enough equity in their homes after the new appraisals drop the value excessively?
I would like to refinance, but my home value is so low now that I don't have enough equity. Savings for me... nothing.

 
At 3/19/2009 4:08 PM, Blogger 1 said...

"The low lending standards contributed to the bubble bust more than low interest rates.

Will the banks learn the lesson?
"...

Maybe you should actually direct that question to the likes of Barney Frank and Herb Moses...

Meanwhile fresh evidence emerged that more largesse was about to be doled out to the government's hand-picked executives running the troubled mortgage giant Fannie Mae....

 
At 4/15/2009 2:40 PM, Anonymous Mortgage Rates Man said...

It's unbelievable how low rates are getting. Unfortunately, credit is still tight. You still need incredibly high credit scores with big downpayments and even then it's questionable as to whether you get approved.

Sometimes I think it would have been easier and more cost effective for the government to have just taken every bad mortgage in the country and paid them off completely and handed the deed to the new homeowner.

 

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