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Low Interest Rates, Better Economy?

low interest ratesMortgage interest rates have been at historic lows since the housing crisis of 2008. These low interest rates were intended to make home loan options more affordable and increase the amount of discretionary income a household had in order to stimulate the economy. Research has shown that the drop in rates has helped in some ways, and not made much of a difference in others.

Professor Marco Di Maggio from the Columbia Business School conducted research in conjunction with the Federal Reserve Board on the effects of the drop in interest rates. They primarily focused on households that had an adjustable rate mortgage that was funded in 2005-2007 and adjusted after 5 years between 2010-2012. The average drop in rate for these homeowners was 3.3 points, which was an average of a $900 decrease in mortgage payments. The study found that the homeowners who suddenly had a large increase is discretionary income spent it in two different ways, either to make a large purchase, or to pay down existing debt. To read more about the research done you can access the article here at Columbia Ideas at Work.

Many families purchase a vehicle after seeing the large increase in discretionary income, this undoubtedly helped the economy as the number of auto sales increased. Others argue that the families who paid down debt did not help to stimulate the economy. However, if they are paying down debt and therefore decreasing their monthly payment obligations. In the long term this will increase their amount of disposable income that can be put back into the consumer economy.

Ultimately it seems that the drop in interest rates have not moved the needle as much as anticipated. Due to a large amount of consumer debt many potential homebuyers still cannot qualify for a mortgage payment even with low interest rates. While the economy is seeing growth, it is not at the rate desired by the government and economists alike.


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Estimated Monthly Payment
$2,385