Consumption and Real Estate
What are the economic implications of a massive wave of refinancing by homeowners to lower rates?
Question : What are the economic implications of a massive wave of refinancing by homeowners to lower rates?
If interest rates were to drop significantly more, say 30 YR fixed to sub 3%, and a huge percentage of homeowner mortgages are refinanced, what implications does this have on the broader economy, e.g. money supply, inflation, etc?
refinancing rates
Best answer:
Answer by SDD
It would mean less interest being paid each month, which would mean households would have more money to spend on other things.
I think the trick is to understand that a large part of the money people ‘save’ by not paying as much for their mortgage will be spent somewhere else. It’s just a reallocation of expenditure, not a decline in expenditure. Hence any spin-off effects are likely to be minimal.
In fact, people might feel richer, since mortgages generally weigh heavily on people’s minds; a lower weight might be liberating, and as people feel richer they spend more; they need lower reserves to cater for mortgage payments in case of rainy days; the average and marginal propensities to consume might go up.
Consumption would increase which would be very welcome in today’s economy; the Aggregate Demand curve shifts right, there might be some inflation an increase in output.