Monday, October 31, 2011

Are low mortgage rates hurting the purchase market?

  For the last few months, I have seen lots of chatter on this subject.  Twitter comments, articles in major newspapers, etc.  It seems that more and more people are asking this question-are mortgage low mortgage rates hurting the housing market?  My answer has been and will continue to be absolutely not.  Here are some of the arguments that I have seen:

1.  By announcing low rates through 2013, you give buyers the ability to sit and wait until the market hits bottom. 

   On the surface, its sounds logical and plausible but let me explain why I think this holds no water.  Put yourself in the shoes of a potential buyer these days.  Here is what they are worried about:

      a.  Losing their job to cut backs due the lousy economy.
      b.  Not getting their bonus this year.  Something they always count on.
      c.  Rising credit card debt.  The bills never stop and they don't get smaller.
      d.  College education bills.
      e.  If I lose my job, what are the prospects that I will get another quickly, or at all?

  I ask you, will a few hundred dollars in lower mortgage payments or the prospect that real estate values may drop within the next 2 years be a big enough influence to make people buy something?  Not a chance.  People are frozen by fear because the economy is in the toilet.

2.  Everyone is refinancing to a lower rate and in order to recover closing costs fees, the borrowers feel the need to stay where they are for several years.

   I have never once heard a borrower say something like that to me.  If they see a new house that they want, a few thousand in closing costs will never stand in their way.
   I think you would be hard pressed to find someone who doesn't think that the Fed lowered rates to spur the purchase market.  That is, other than myself.  The Fed knows that consumer sentiment is in the tank and that people are scared to buy.  They did it because they wanted to put as much money in people's pockets as they could.  Short of a tax cut, refinancing a home loan is the single greatest way to accomplish that.  Call it the "homeowner tax cut".  Any people that are still buying in this environment could gain from it as well but its intended target are existing homeowners.


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