I know this post is likely to get some negative or differing feedback, and that's fine - but please read the entire blog post if you are going to respond.

I have had a lot of feedback from other agents about the mortgage rate debate in response to some of my other posts so I wanted to dedicate one post exclusively to this topic.

And as I have said before in the past, I am not opposed to lower mortgage rates, I would prefer them, but I don't think they will solve the housing crisis.  I also think that any debate on the housing market needs to be focused on stimulating demand, so this is the issue I will address with this post.  Any discussion on refinancing needs to account for many homeowners inability to refinance because their home is worth less than what they owe on it.  Lowering mortgage rates doesn't change this.

I think the first thing to understand, as Paulson learned the hard way a couple of days ago, it is very difficult and expensive to manipulate mortgage rates.  The government recently committed to purchasing $500 billion worth of mortgages from Fannie and Freddie in an effort to lower mortgage rates.  The result so far according to bankrate.com is that the 30-year fixed rate mortgage was 5.98% last week and is now 5.70% this week.  An improvement, but a modest one, and certainly an expensive one.  NAR as well as the NAHB have talked about lowering mortgage rates as part of their stimulus plans but I am curious if either of them knows how much it will cost to get mortgage rates to 3% or 4% - or if it is even possible.  I honestly don't know.

The second thing I want to point out is that mortgage rates are still near historic lows.  This year, according to FreddieMac, the 30-year rate has averaged 6.11% through October.  In the four years that we have seen in excess of 6 million home sales, the years from 2003-2006, mortgage rates averaged 5.83%, 5.84%, 5.87%, and 6.41%.  The current mortgage rates are certainly in line with those of these four years yet it is probable that less than 5 million homes will be sold this year.

Here is a comparison of homes sales relative to mortgage rates for the past six years:

2003:  6.175 million / 5.83%

2004:  6.778 million / 5.84%

2005:  7.076 million / 5.87%

2006:  6.478 million / 6.41%

2007:  5.652 million / 6.34%

2008:  4.980 million / 6.11% (these are seasonally adjusted home sales)

When looking at these numbers, it is very difficult to make any correlation between home sales and mortgage rates.  For example, mortgage rates are lower in 2008 than in 2006, yet in 2006 we had approximately 1.5 million more home sales.

I think the perception is that lower mortgage rates effectively lower the "cost" of home ownership.  Financing for a home becomes less expensive and as a result, the home becomes more affordable.  I don't disagree with this logic.  But to whom are we increasing the affordability for?  What I do disagree with is the number of qualified buyers that have down payments that are still sitting on the sidelines waiting to buy a home for the first time.

Data from the U.S. Census Bureau shows that home-ownership rates are in the 3rd quarter of 2008 were  at 67.9%.  The only time in our history that we have had higher home-ownership rates was during the subprime lending era.  Traditionally, the home-ownership rate rate has been between 64-66%.

What is interesting is that for a long time the argument was about affordability, that home values were too expensive, well, home values have come down the past two years, and yet despite this, home sales have plummeted.  The median home value in the U.S. in October was $183,300, it is down nearly 18% from the high in 2006, yet despite this, home sales are also down nearly 24% between 2006 and 2008.

The one exception to this flawed affordability debate is in the West region which includes California.  Home sales in the West, according to NAR, are up 40.5% from last year as a result of property values declining -27% during that same period of time.  The reason California is the exception to this flawed affordability debate is because California only had a home-ownership rate of 58.4% as of 2007, well below the national average of 68%.  Californians would benefit from lower mortgage rates (increased affordability), I am not convinced we will see these same results throughout the rest of the country.  California was one of the very few markets in which there are qualified buyers with downpayments that simply could not afford a home, the data for the past two years has shown that this is simply not true for the rest of the country.  It is not true for the rest of the country because despite declining home values and low mortgage rates, home sales have still fallen for the United States the past two years.

The reason I wanted to write this post is to shed some light on what I believe to be is a flawed proposal by the NAR, NAHB, as well as the government, to promote home sales by lowering mortgage rates.  Additionally, it is worth debating, at what cost would the government even be able to manipulate artificially low mortgage rates?  Is it worth "investing" a trillion or two trillion dollars to lower mortgage rates to 4%?  Is that even possible?  The lowest a mortgage rate has been able to be sustained for a period of one month was 5.23% in June of 2003.

As I have said, I would rather have lower mortgage rates then higher ones, but I don't believe that this is the most cost effective solution to stimulating demand for real estate.  Stimulating new demand for real estate is going to require new fiscal policy.

I detail my proposal here:  www.ItsTheHousingMarketStupid.com