Question by Nathan: 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?
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.
Give your answer to this question below!
The FED cannot raise the fund rate, and the economy still has a chance to go down again.
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.