Don't confuse it with a recovery, but the combination of falling mortgage rates and cheaper energy is good news at a crucial time for the U.S. economy.
The takeover of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) by the government has done what Federal Reserve interest rate cuts were signally unable to do: reduce interest rates for mainstream house buyers.
While this is not enough to stop house prices from falling further, it probably brings forward a recovery and lessens the chance of a damaging downward overshoot and all that implies for the further destruction of bank capital.
It also will give much needed relief to many mortgage holders who are not trying to buy or sell, but who will be able to refinance into mortgages with lower interest rates.
And with oil now trading at about $100 per barrel CLc1 LCOc1, down more than 30 percent from its summer peak, consumers will get some relief on energy and transportation costs. Gasoline prices have now fallen for nine straight weeks and the price of heating this winter will also be lower, though both will still be considerably more expensive than a year ago.
"Things are looking up a little bit; inflation has peaked, temporarily or not, and you have a boost coming through to the housing market," said Tim Bond, head of global asset allocation at Barclays Capital in London.
As of the end of June the average interest rate on all outstanding U.S. mortgages was 6.23 percent, while on Wednesday Bankrate.com was showing average conforming 30-year mortgage rates at 5.79 percent, down almost 50 basis points from the week before. Those rates are likely to fall further in coming weeks as Fannie and Freddie's costs of funding shrink now that they are effectively U.S. government risk.Societe Generale estimates that a 50 basis point reduction in mortgage rates will reduce payments by 5 percent, not huge but a useful cushion.
Taken together, and moral hazard put to the side, the moderation in energy prices and the nationalization of the mortgage industry mean that things are less dangerous than they were a week ago. The average consumer is a little better off, the average house price has less far to fall, the average bank is a bit less at risk.
Better in a meaningful way, but not better enough to avoid substantial further pain.
NECESSARY BUT NOT SUFFICIENT
That's because though the improvements may be necessary for an eventual recovery, they are not in and of themselves sufficient.
Oil is arguably falling because declining economies everywhere from Tokyo to Los Angeles to London are destroying demand for energy.
And though this helps the U.S. consumer, times are still tough and the temptation to commit that most unnatural of U.S. acts -- saving -- may be too great. In fact, the personal savings rate hit 2.5 percent in the second quarter, a substantial jump.
Remember too that the job situation is deteriorating quickly. The U.S. unemployment rate hit 6.1 percent in August, the highest since September 2003. So it is hard to imagine that the United States will be seeing anything like a consumer recovery, but it is possible to believe that the consumer will retrench less deeply than otherwise would have happened.
And again, the bailout of Fannie and Freddie were necessary to save the banking sector, but not sufficient to restore it to health. A big risk at the extreme end -- of a catastrophic rolling failure -- has been averted, and the restoration of cheap credit to a part of the housing market will help.That said, there are a lot of things in the banking system that have not been helped by the bailout. Large mortgages are still very expensive, which will exacerbate the fall in house prices on the East and West coasts. The lists of foreclosed properties are still lengthening, and though this is a needed part of the market finding a real price for housing, you can bet that the process of deleveraging in the banking system will continue to be painful and will bring with it some very big failures, not to mention further assumption of private risk by the public purse.
As we are seeing with Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), the process of trying to recapitalize and cut risk when everyone else is trying to do the same is not simple or quick. There are few buyers for financial services companies or their assets and big doubts about the very business model.
There is still obviously much for the authorities to do: convince the world the United States remains a good place in which to lend money, design a new mortgage system and create a new regulatory regime for financial services.
But, given the alternatives, U.S. consumers and the rest of us who depend upon them may want to be thankful for small mercies.
-- At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund --
