Low mortgage rates are a key reason why the housing market and the economy remain anemic.
Has there ever been a better time to buy? Mortgage rates are at record lows and housing prices have fallen sharply in the past several years yet overall demand remains modest. Affordability remains near all-time highs so logic would suggest that we should be in a housing boom right now.
Some say consumer confidence is to blame but I contend that’s a cart before the horse argument – confidence is merely a reflection of how credit and the economy are doing, not what is causing the current weakness or perhaps it becomes self-fulfilling.
Mortgage rates are too low
I’m not saying that mortgage rates should be high, but they should be allowed to float to their natural level. By the Fed keeping rates low until 2013, that’s 2 more years of restrictive mortgage lending.
I’ve provided more detail in another post but here is my key point:
Banks are faced with making this economic choice
1. Borrow from the Federal Reserve for free and then invest at low risk and make 4% at “AAA” (little) risk.
2. Lend money to Joe and Mary Homebuyer at 4% and face the perceived risk of layoffs, foreclosure, declining home prices, modifications, additional regulatory pressures, etc.
Banks are choosing “1”.
If they choose “2”, they will force Joe and Mary Homebuyer to be a “AAA” quality (more like “AAAA”) risk to match choice “1”. As a result, fewer borrowers qualify for a mortgage than they would in a balanced credit environment and those who do are jumping through a significant number of hoops to qualify for their mortgage. In other words, lenders don’t really want to lend unless the loan quality is “AAAA.”
Low mortgage rates are actually damaging the housing market.
• Credit will very tight with no relief until the Fed stops keeping rates artifically low.
• Sales activity is kept in check by restricted mortgage lending.
• Lower sales activity keeps prices fragile.
The lesson to brokers to succeed in today’s housing market? Place as much effort on confirming the qualifications of your buyer and the terms they can afford as you do finding the right home for them.