Operation Twist is doomed to fail

The US Federal Reserve recently launched ‘Operation Twist’: it is buying long-term government bonds and mortgage bonds in order to lower the interest rates on them and thus boost overall economic activity. As a result, US mortgage rates have fallen to record lows. The average 30-year fixed rate edged below 4% for the first time ever last week. But if the Fed is hoping to revive the housing market, it is in for a disappointment.

Low rates aren’t reviving demand. Applications for mortgages for house purchases are near 15-year lows, according to the Mortgage Bankers Association. One problem is that high unemployment and the lacklustre economic backdrop are discouraging purchases. The nasty slide in house prices – down by more than 30% from the 2005 peak – has put many people off home ownership. Meanwhile, mortgage qualification standards have become stricter and a fifth of homeowners are in negative equity, so we can’t expect a bounce in refinancing.

There’s also a supply overhang. Banks hold around half a million houses on their books, says Nick Timiraos in The Wall Street Journal, but almost four million additional loans are in some stage of foreclosure or “seriously delinquent”. The upshot is that prices haven’t stopped falling yet, and look unlikely to mount a sustainable recovery for another four years or so.