Mortgage rates need to go lower
After December progress in working through the inventory of houses sitting on the market, we had a setback in January. Sales of existing homes as well as new homes were a big disappointment.
Both housing sales indicators fell to their lowest levels in years (seasonally adjusted to reflect January's slow pace compared with other months). Thousands bought up houses at bargain prices, especially in California and Nevada. The median sales price nationwide for a house sold in January plunged 15 percent, to $170,000, from the level a year earlier. That was the lowest level since 2003, when the housing bubble was just starting to inflate. But overall the results were weaker than what economists expected.
We need one more ingredient to move the lumber in sufficient volume to get the housing crisis behind us: even lower mortgage rates. There has been progress. Thanks to action by the Federal Reserve in the long-term lending markets, the fixed, 30-year mortgage rate plunged from 6.4 percent in October to around 5.2 percent now. But it still hasn't dipped below the magic 5 percent. Home loans of 4.5 percent could really accelerate the recovery.
In December the Fed said it would buy "large quantities" of mortgage bonds and debt issued by mortgage agencies to get rates down. It also said it "stands ready to expand its purchases" if needed. Seems like it's time to do so.
Comments
Jay,
We do NOT need lower mortgage rates, we need much higher interest rates then today.
I know this sounds counterproductive, but these artificially low rates will cause a nightmare of lowering housing prices again after finally hitting what appears to be a bottom.
5% interest 300k mortgage payment before taxes and insurance is $1610/mo.
8% interest 220k mortgage payment before taxes and insurance is $1614.
Now we all know that in the future when this treasury bill bubble bursts the FED will be forced to dramatically increase interest rates to attract capital to pay for the bills of the federal government that just increased spending based on this cheap borrowing capacity.
I for one would rather buy when rates are high because when they do eventually come down I can refi lower, whereas if you buy now your screwed and will never have any flexibility.
Rates are low right now to buy us time and get people to refi out of these crazy exotic mortgage products.
This policy can only last another 18 months at the most. Much much higher rates are inevitable.
Why people cannot get this I'll never understand. The idea of treating a house as an investment vehicle is throwing money away. House prices are based on incomes and what people can pay each month. The only thing people care about if they have to finance is the payment per month. Prices will come down to meet that.
Posted by: Adam | February 27, 2009 9:27 AM
Adam, you made what I see as contradicting statements.
"...but these artificially low rates will cause a nightmare of lowering housing prices again after finally hitting what appears to be a bottom."
and,
"House prices are based on incomes and what people can pay each month. ...Prices will come down to meet that."
I agree with the latter but not the former.
The bottom is not even close to representing that affordability.
Posted by: MrRational | February 27, 2009 10:18 AM
It doesn't make since to me to get a mortgage no at a higher rate just so that you can refinance lower later. Why not get the low rate now and stick with it.
Also, the home price should not have any effect on the rate. Home value should be determined independently. Use that value to determine loan to value, which would then determine where the interest rate goes based on a reference index. If you can afford the payment based on that, don't buy the house.
Posted by: Curt | February 27, 2009 11:01 AM
Until the prices for all commodities deflate, interest rates don't really matter. The best way for housing to correct is to let the banks and other investors take their losses, even if it means going out of business, and start over. Workers are not going to see large inflation in their to make up the difference, so the the price side of the ledger must fall.
Posted by: Flair | March 1, 2009 12:21 PM