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The problem with lower mortgage rates

By
Real Estate Broker/Owner

The mortgage bankers association published their weekly mortgage applications survey today and the data was not what you may think.

The good news is that refinance applications surged 62.6% from last week as the 30-year fixed rate mortgage dropped from 5.18% to 5.04%.  Not much of a surprise here as 5% is really cheap mortgage money.  And the benefit for the broader economy is that as home owners lower their debt service on their home, they in theory will have more disposable income to spend or invest - which is a good thing.  It is a bottom up approach to stimulating the economy which I am an advocate for - although the methods for accomplishing this are a little unconventional.

The "disappointing" news is that purchase mortgage applications are up only 10.6% for the week.  I say only because what this means is that lower mortgages rates are not going to be enough on their own to stimulate aggressive demand for housing which is something the housing market desperately needs; especially considering that existing home sales dropped -8.6% from last month on a seasonally adjusted basis and -10.6% from last year.

The four week moving average for purchase applications is even more anemic as they are up only 4.5%, compared to refinances at 42%, since the 30-year fixed has plunged.   The problem with lower mortgage rates is that they are not stimulating demand for real estate so that we can absorb the excess supply of homes.

As I have advocated before, rather than the Fed "investing" billions into the mortgage market in the "hopes" that it will stimulate demand for housing, what the government needs to be doing is providing tax incentives for those who actually do invest.  This housing crisis is not about affordability, plenty of people can afford to buy a home and invest in real estate, what is missing is the motivation to do so, the cost/benefit.  As prices continue to fall, and as sales decline, as they are at a record pace, confidence in the housing market will continue to erode. 

 

Comments (2)

Steve Shaw
Keller Williams Realty - Mobile, AL
e-PRO, Gulf Region Properties Team

Mark,

Great post and great blog.  We deal with many investors.  Here along the gulf coast there were the GO Zone incentives available and it worked.  The purpose was to provide housing in our area and the investors would receive tax benefits. 

I am with you.  The government needs legislation that will entice the investors to purchase.

Steve

Dec 24, 2008 08:26 AM
Jim Frimmer
HomeSmart Realty West - San Diego, CA
Realtor & CDPE, Mission Valley specialist

I've never been a fan of the "trickle down" economics that Reagan made so famous. All it did was cause the U.S. trade deficit to balloon out of control, and only Clinton since then made a significant effort at bringing things under control. Unfortunately, the lack of oversight promulgated by the current Bush administration brought everything crashing down. It's going to be a long time before the mess is cleaned up unless Obama and his team come to realize that it truly is Main Street that needs help, not the big whigs on Wall Street. Let those big whigs fail and come out and get a normal job with the rest of us.

Best wishes for health, happiness, peace, and prosperity in 2009.

Dec 27, 2008 10:25 AM