Lower interest rates have spurred a wave of mortgage applications- there’s a lot of people looking to refinance. There does not appear to be a wave of buyers out there however. Scott Sambucci of Seeking Alpha says that the solution may higher interest rates and lower prices. He explains:
I ran the numbers based on a $300,000 home price and a $240,000 loan (though I’m not sure someone buying a $300,000 house will have $60,000 to put down to cover the 20% down payment requirement, but this is an experiment).
At a 5.5% rate, the monthly payments are $1,712.69. At a 4.5% rate, the monthly payments fall by $146.65 to $1,566.04. The move from 5.5% to 4.5% is a drop of 18%.
Now what if home prices fell 18% from $300,000 to $246,000 (a decrease of $54,000) but mortgage rates stayed at 5.5%? Assuming the same 20% down payment, the loan amount would be $196,800 for a home priced at $246,000 and the monthly mortgage payment would be $1,404.41 – a drop in the monthly payments of $308.28. Which would stimulate demand more – lowering the monthly payments by $146 or $308? Lower mortgage rates will lead to lower housing prices as viewed by the buyer (in terms of monthly payments), but not by as much as lower home prices.
Yes, I realize that this is blasphemy because I’m advocating unchanged mortgage rates and a continued fall in home prices. However, the net gain is that lenders can lend to more borrowers at the higher rate. Why? Because the extra 1.0% offers a risk premium to lenders that will enable lenders to account for the riskiness of the buyers (we don’t pay our bills here in America), thus increasing the number of buyers that would quality for approval. Additionally, a decrease in home prices would lower the income requirements for approval for buyers of this same risk profile. At a lower interest rate (say 4.5%), lenders will be forced to maintain stringent mortgage approval guidelines and the lower rates would have less effect on a buyer’s monthly mortgage payments.
Remember – it was cheap money to unqualified buyers that bears considerable responsible for the housing price mess in the first place.
Sambucci makes sense. Without government interference, in the current environment, the trend would be to higher rates and lower prices. At some point, there is an interest rate at which lenders are willing to lend without government backstops. To compensate prospective buyers for the higher rates though, prices have to drop to a more attractive price. After all, it stands to reason that when economic conditions improve, rates will go down and refinancing becomes attractive. Consequently, higher rates are less of a psychological barrier to buying that higher home prices.
If the government wants to jumpstart the housing market, they should quit tinkering with it.
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I fully agree with this reasoning, especially when taking the long-term view and considering the impact on trust in the housing market.
If I buy today at an artificially low rate, then at some point in the future the rates will increase and the value of my house will likely be diminished, resulting in a further reduction of trust in housing as a sound investment.
If I buy today at a higher rate, my home’s price would be lower (all else equal) and if rates fall in the future I would see upward pressure on prices and an opportunity to refinance, building trust in housing investments.
If we’re trying to restore trust in the housing market, the higher rates are better than the lower ones right now. Stabilizing home prices today through lower rates is a short-term fix that won’t work over time.
We’ve already seen the disastrous results of our beloved fed actions. We’ve seen the disastrous results of our beloved oversight committees(asleep at the wheel). Now we have no choice but to let more personal wealth disappear in letting nature work its wonders. Wal-Mart will be just fine
Your story is just ridiculous. Give up. Housing is not part of the economy anymore. Quit trying to breathe life into this corpse.
Housing is now a social welfare agency. Face it, and concentrate on making that social welfare do its job: keeping people in housing.
How long are you going to keep tinkering with this bogus notion of a “market” in relation to housing?
Wake up. BAN HOUSING EVICTIONS.
@jryskmpr
For the socialzied housing to work we will need maintenance. A house requires work. Govt workers to make this work? Which authority determines the worker vs. the sloth ? By definition they can not be one and the same. Or do we take turns ?
Santopping-
Obama has promised us millions of new jobs- perhaps he’s going to put all the unemployed Wall Street types to work as landscapers and handymen. He can hire even more people to determine who’s a worker and who isn’t, or maybe just provide everything for everybody to avoid being judgemental.
Then he can hire more people to print all the worthless dollars this plan will take, and more people….
Good work on the numbers Twist. Prices will fall. I believe prices will fall a lot faster in 2009 then they did in 2008. Higher inventory (due to foreclosures) and higher unemployment will precipitate this.
jryskmpr
Give up, food, clothing, utilities, healthcare and transportation are not part of the economy. Therefore, everybody needs to quit their jobs and get free everything.
a drop of 147 from from 1713 is only about 8 1/2%??? what am i missing? i’m no math major so i must be missing something. but when i tried to run the experiment based on an 8 1/2% drop i also realized that a 30 year fixed at 5.5% on 240K is only $1362/month. i have no idea where these numbers are coming from but i think the whole experiment is bunk. am i missing something? don’t necessarily disagree with the logic….but the math doesn’t support it.
and yes, igor….i think the experiment is “absurd”
… for what it’s worth, I was
1713 x 0.085 = 145.605 — Go calc.exe!
“Bitter,” says Igor, but that’s only it being Monday morning.