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Why Rate cuts won't help the housing market much

I have posted about this issue before and I have gotten many comments telling me I'm crazy.

I've been in the mortgage business for over twelve years and I can honestly say that rates have had a very small impact on people's decision of whether or not they should buy a home.

The biggest factors I have seen are:

1) People's perception of where housing prices are going - If people think (as they do now) that the house they are looking at will be priced less in the near future they will wait (even if rates are at 1%)

2) People's need for a home (as opposed to renting) Obviously there will always be people who need more space and who need to live somewhere else, but in the current economic environment, many more will continue to stay put.

3) Mortgage Eligibility. The boom of the past several years was caused not by low rates, but by the enormous increase in eligibility. 100% financing with no-income and poor credit made buying a house too good to resist. Today, due to eligibility being pulled back, at least 50% of the buyers who were eligible in 2005 cannot qualify for financing right now. The truth is that eligibility today is probably what it should be, despite what you hear from the media. Is it too much to ask for someone to show enough income and have good credit? Is it too much to ask for someone to put 10% down when they buy a home?

I would be thrilled if rates continue to fall, because there will be many refinances that i will get paid on, but the concept that lower rates will help housing is one that i just don't subcribe to. Eventually (2011?) housing will rebound on its own (after the many homes in foreclosure get through the legal process and get sold) and people will get off the sidelines. They will start buying when they think that they will lose out if they wait. Even if rates are 7% instead of 4%

Posted by Michael Pinter on 12/26/2008 10:02 AM

Comments (65)

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65 Comments on Why Rate cuts won't help the housing market much

DEC

I don't think you are crazy Michael. I have several buyers who are thinking just the items you mentioned!

I agree, the number of qualified buyers is the major problem.

Happy Holidays!
Shawn

Hmmm....interesting...I agree.....in part...like anything else...not every buyer is the same...I had two in the last week in the high six figure category tell me that if rates go below 5 per cent, with the great prices and still good selection...they would have to be crazy not to buy...we'll see if they go to asylum or put their money where their house is !

Hi Michael, I so agree. I have been saying the exact same things. The low reates will certainly help those with very high credit scores...do all those people want or need to move? The majority of people suffer from credit card ebt and low credit scores...and that will not buy them a house. Think about how many buyers were in that sub prime market arena before every thing exploded.

There's alot of truth in what you are saying here. I have read many articles saying, "If rates were lowered to 4.5%, the buyers would come out of the woodwork". Well, rates are very low, and a week or so ago they werent far off of that mark. Interest rates will have some bearing, but not nearly as much as some people may think. Good post.

Kristin,

Thanks for the comment. I appreciate the support. Feel free to subscribe to my blog.

Michael Pinter

Shawn,

Thanks for the comment. you are right on teh money. Unfortunately I don't think the number (or percentage) of qualified buyers will change much in the near future. Feel free to subscribe to my blog.

Michael Pinter

I have to agree. The buyers that are already looking are thrilled, but the lower rates doesn't seem to have an impact on those who are on the fence.

Sally & David,

Thanks for the comment. Ther are many people who will buy now, if they qulaify, but my point is that rates don't have the macro effectthat most of the pundits say it does. There are so many larger factors. Feel free to subscribe to my blog.

Michael Pinter

June,

Great comment. Thanks for the support. i agree with you completely. Feel free to subscribe to my blog.

Michael Pinter

Robert,

We are on the same page. Thanks for the comment. Feel free to subscribe to my blog.

Michael Pinter

I think this is true for some people, but not all. The biggest factor I have seen is fear that the buyer will lose their job. I would suspect there are several factors at work.

Colleen,

Thanks for the comment. I appreciate the support. Would you buy a home if you thought the price would be $25,000 or $50,000 less in six months? Even if rates were1% Feel free to subscribe to my blog.

Michael Pinter

Joan,

The overall fear of the economy is a big factor too. But think about this: Would you buy a home if you thought the price would be $25,000 or $50,000 less in six months? Even if rates were 1% Feel free to subscribe to my blog.

Michael Pinter

Iam noe of those that thought that these rate increases would help, thankfully because of people like you know are well informed you have educated all of us that this is not so....:)

Konnie,

Thanks for the support. I really appreciate it. Feel free to subscribe to my blog.

Michael Pinter

I agree that mortgage eiligilbility remains a huge issue. I have a home far away that is now a rental. I would love to refinance and take advantage of the lower rates, but I can't qualify. Yet I continue to make the current monthly payments on time. Go figure.

Vickie,

Kudos to you for still making the payments! I am in teh same boat as you with two properties. Thanks for the comment. Feel free to subscribe to my blog.

Michael Pinter

I agree with you totally. We have just experienced a different real estate phenomenon and basically it was lax credit standards. Home prices will continue to decline due to lack of demand.

Jim,

Thanks for the comment. You and I are on the same page. Feel free to subscribe to my blog.

Michael Pinter

I agree it is not the interest rate it is the concern over the future both of housing prices and their jobs.

I agree. I purchased my first home in the mid 80's our interest rate was close to 17% the bottom line for us at the time was could we afford the monthly payment period. People purchase when the time is right for them, price of the home is a big consideration and if the market is climbing or falling on home values. Change will come, I still like to see the rates low however... It doesn't hurt!

Michael... you are preaching to this choir.... I just had this same talk with my appraiser and my parents yesterday. I even wrote about this a few weeks ago, in which I was attacked by a loan officer. I need my quick fix !!! Please pass me that 4.5% rate over here NOW !!!

Overall, we need more education, more blogs written like this. You hit the nail on the head, some of us would do well with the refinances, if it would be allowed with the lower rates.... but other than that, it will hurt us in the long run. Those on the fence, lower rates will not push most off. It's the economy. As I mentioned in my other post, a savings of $110 will not be the end to all to by a house. Well, at least it shouldn't. Can you see that this gets me fired up.. lol Happy Holidays.

jeff belonger

I agree that your assessment is right on target. Those that are critical are likely either (1) in a very unusual market and are not understanding the other markets and/or (2) so desparate to believe a return to the boom is near that they must shoot the messengers instead of adapt and plan appropriately. Great post!! G

Terry,

Thanks for the comment. Feel free to subscribe to my blog.

Michael Pinter

Caron,

I agree completely. Thanks for the comment. Feel free to subscribe to my blog.

Michael Pinter

Jeff,

Thanks for the support. I really appreciate it. Feel free to subscribe to my blog.

Michael Pinter

Glenn,

Thanks for your support. Feel free to subscribe to my blog.

Michael Pinter

Michael, I was on the mortgage side for 14 years and agree. Lower rates are great for the buyers already seriously in the market but unfortunately for all of us, it is no going to bring a huge rush of buyers to the market. It probably will get people into thinking about buying their first home or making a move but won't be the single determining factor.

"People's perception of where housing prices are going" Perception is reality for most people. You make some great points. "Eventually (2011?) housing will rebound on its own (after the many homes in foreclosure get through the legal process and get sold) and people will get off the sidelines." This is true....One additional thing I don't understand is why builder's are building anything (even one home) in this overbuilt market (at least our market is overbuilt)?????

You are right! Great Blog! I certainly know that lenders won't starve if the rates go down. There will be a tremendous amount of refi's out there...if they can get their appraisals. I do believe that the rates will help...anything will help right now! It will take a bit to regain our equity positions.

By-the-way, what are you doing for realtors who own more than 4 properties...maybe closer to 20...'can't refi; can't buy; can't sell...YIKES!

I'm really excited to see what comes about in 2009...Happy New Year! Robin

Dan or Amy,

Thanks for the comment. I really appreciate the support. Feel free to subscribe to my blog.

Michael Pinter

I will disagree with you for my market. I think it will help from several segments. I have had 3-4 past clients call me about looking to move up. I am only one realtor. We have had very few new homes in this market built in a few years, too many poor than can never buy, banks have plenty of money, conservative nature of the buyers, prices are more or less stable in these segments.

I however totally agree with you on certain segemnts of even this market. It is more about jobs and how people are feeling about future income here rather than falling prices.

Lalalala, ...that is the sound of me singing right there with you. The indicators are all there. Whether people choose to actually pay attention to them is another story. Oddly enough the consumers are the ones making the least noise about this. The industry and all those in it are making the most noise, b/c they do not understand it or refuse to learn it.

Good post Michael. You are spot on!

Michael,

Yet another great point - something I have been saying for several months - and something that many agents have been disagreeing with me about.

Lower rates will help refinances - but refinances are not the problem - new demand for real estate is.

If the government wants to "fix" the housing market, and I think that they understand the importance of it and how it impacts the broader economy - they are going to need to use tax credits (with an expiration date) to entice buyers to enter.

I have been proposing 50% bonus depreciation for investors.

Stop spending hundreds of billions of dollars "buying mortgages" and hoping people buy, and start rewarding Americans that actually do buy.

I totally agree! I wrote a simular post a few weeks ago. I bought my first home in 1976 when interest rates were 11%. People were still buying even then.

Michael,

I have been in Real Estate for 11 years and I gree with you. I think the lower rates will be a boon to lenders because many, many people will look to refinance. I do think that the lower rates will get some buyers off the fence, however, but I don't think they will come in droves. I do appreciate, however, that when in current times, if as a Realtor we have a good buyer, then we really have a good buyer -- one with good credit, a good job and the will to move forward.

There is no doubt that 2009 is going to stack up as a very interesting year.

I am going to call you crazy...to an extent. I think people shop monthly payment and the "what is in it for me?" So if the interest rates are low and home prices are falling can a given client move up the property ladder. Maybe there is a home that they looked at 2 or 3 years ago when interest rates were 6.25% to 6.75% now that same (or similar) home is now listed 10 - 20% less and interest rates are plus or minus 5%. What is the math on that? Sure their existing home will also list/sell at the same 10-20% less.

The vast majority of the US population is employed. Of those employed their jobs will be here next week, next month, next year and in 5 years.

Sure the "pie" is smaller but still tasty...now everyone go out and get a piece for yourselves.

One other thing, it is not just your opinion, according to the Mortgage Bankers Association, mortgage purchase applications are only up 4.5% on the four week moving average - compared to an 42% surge for refinances.

Additionally, nationally, home sales plunged in November by -8.6% on a seasonally adjusted average despite lower rates.

This is a significant problem, and yet the NAR is still calling for 4.5% mortgage rates via a Treasury buy-down.

Michael, you are absolutely correct. It's all part of the herd mentality. When everyone's buying, they all want to buy no matter the price. When no one's buying, no one wants to take the plunge even if there are some really good buys out there.

They'll be kicking themselves in a few years when they can't afford it.

@ Chuck... I disagree... many people don't shop payment, they shop rate. It's not until a loan officer dwells on payment, asking them what they are compfortable with. If you took a survey, many loan officers qualify the borrower on the max that they can buy and then go down. It shouldn't work like that for many reasons, which I have written about.

jeff belonger

Michael: My gut tells me you are right. I don't understand why rates keep going lower and lower....and prices are going lower and lower. Aren't these two things typically like a see-saw. One up, one down. Can we really expect home prices to recover when interest rates have no where to go but up. Won't that just send home prices back down when that happens?

Michael: Right on. Rates aren't our problem today. And lower rates will just create a whole new inflationary bubble and people will overbuy and overextend again. We're not only NOT learning from history, but we're purposely trying to recreate the worst of it. UGH!

Michael, I have to agree on many levels. In my market the primary factor is lack of ability to qualify. Our jobless rate is approaching the highest it's been since the mid 80's and many dual income families are now trying to survive on a single provider with the other spouse out looking for anything as they've been 'downsized or laid off." Also, in the world of refinance, I can't see how when homes here are often $100,000 higher in debt than their current market value, a person can come up with the cash difference to create a re-fi opportunity. Lowering the rates is a small help but not the panacea it is being touted as.

Your EXACTLY right, I used to close 3-5 a month with rates in the upper 5's-6's and now 1-2 with rates in the low 5's.....it ain't rocket science!

I agree with your 1st point about people's perception of where housing prices are going. I heard from several buyers who are waiting on the sidelines that if they buy a house now it will probably go down in value another 15% over the next 12 months.

This is part of the market correction we are currently in and a result of home prices becoming highly inflated due to demand made possible by the enormous increase in eligibility that you reference.

So now we have a huge inventory that continues to grow due to homeowners that can no longer afford their mortgages who are trying to sell before the bank foreclosures and subsequently REOs. REOs are priced competitively but then adjusted downward to prices that generate a quick sale and simultaneously continue to drive the market lower.

The market conditions of increased inventory and fewer eligible buyers will continue to drive home prices down until they are priced low enough to attract investors who are in the market for rental properties.

Lower rates may help a few families refinance and allow them to keep their homes and it may help a few more people qualify for loans but their numbers will be too few to make any significant change in the market.

Lower rates will help when investors enter the market. Lower rates for investors will make it easier to achieve profitability.

I agree with you, the perception is that house prices will continue to fall and interest rates at 3% isn't likely to inspire to many people to buy, but it will drive refinance business big time. The message should be, if you are looking to buy a home to live in for the long term 7 years or more you should buy now. A few years from now home prices will be on the rise again. I personally believe at least in my market we are at the bottom, convincing people of that is the hard part.

Michael,

First of all congrats on the feature! I do believe that the refinancing boom that is coming will put some money into our economy. I do agree with you that people just are not biting yet with rates headed down.

Not sure I agree with you. It may be true oin your market . But for entry level the lower rates are allowing folks to buy in . We see a pick up n that activity

Charlie,

Try asking your buyers if they are buying because of the rates or because prices have dropped. I 'm pretty sure you'll see that I'm right most of the time.

Michael Pinter

I agree with the basic premise too, however what I feel is really holding people back from real estate right now is largely a mindset problem - especially here in the DFW TX area. We have not seen price declines like other areas of the country, some areas have gone up in value (a little, but up!). People are tired. They are tired of the bleak news on TV and newspaper, they were just pummelled for at least a full year with all the election hype/hysteria/call it what you will. Pres. candidates found it got them more votes to bash the economy, describe it as broken, greedy wall street, whatever. It has all taken hold of peoples mindset and it aint coming out of it without a fight! The country needs a "paradigm shift" Once we can see that the sky is not actually falling, that life will go on, that we must keep living life, thats when I think things in general will start loosening up.

I think that the lower rates will prompt some first-time home buyers to come out; and, that will allow for some establishment of a bottom in housing. It will take some time, as this is just one of several tools needed.

I think you have some very valid arguements here. Even with a lower interest rates the pyschology of a declining market is very hard for most buyers to overcome.

Hi Michael;

Great post and very informative, I am hoping that the lower rates will attract first-time home buyers to come out.

I think I agree with your premise. Thank goodness you'll be able to look forward to the refinancing wave --providing they have enough equity in their homes, right?

I agree too; Eligibility and perceptions of where prices are going are the major reasons why Rates won't matter. I think 2011 is optimistic. As to refinancing; what about eligibility?

I agree with you Michael. I'm a real estate broker AND a loan officer.

Sally and David, rates ARE below 5% in San Antonio! (Excellent credit is a factor in qualifying for the best rates.) So I hope you'll get to sell a house. It's a little slow down here in spite of the rates, but we're still doing very well.

Disagree with your post. It is not the panacea that everyone is looking for, but for "qualified" buyers it will make a difference.

I have buyers sitting on the fence missing out ona great rate, because they just have not found that right house, even though many we have looked at score a 90% hit on the wish list.

Your point is certainly valid... but I am hearing investors that are thinking that the rates in combination with the price are at a good spot. They can buy houses and rent them for positive cash flow... Buyers are starting to think that the rates might be low enough that if they rise... even if the price of the house falls a little, they might have a lower payment...

But, things are still slow. Talk isn't paying the bills.

Aloha Michael, Thanks for the honest post. We have two challenges that I forsee in 2009. Neither is a real revelation on my part. The first is available inventory vs. prospective buyers. We lost a huge chunk of our buyers due to tightening standards. I agree with your statement that availability of financing more so than rates drove our boom. The second element remains our overall economic picture. This dovetails with the potential buyers. Cash available for home purchases has dimished due to diminished national wealth and job uncertainty has people wary of making big purchases.

Michael,

Eligibility plays a key role now in getting borrowers approved, hands down. Low interest rates do bring payments down some but what about sufficient income, or employment in this economy, or down payment, just to mention a few criteria.

If rates stay low into the spring and summer markets, they will have an effect. This is not a busy time of the year in general in the real estate world. I aboslutely think the low rates will help and I'm starting to see it first hand.

DEC

I agree with your observations. I bought my first house at 10% back in the eighties. Didn't give it a second thought. It was what it was and all I was concerned with was whether or not I was qualified.

Lower rates will help people who decide to buy feel a little better about it, but what good is a low interest rate if you don't know if you'll have a job next week? Buyers are smarter than that! We need some serious good economic indicators for this market to stop sliding.

It is all about consumer confidence. Rate changes in this environment may help a tad, but they wont make a major difference until confidence is restored. Hopefully Obamanism will create confidence sometime during the first quarter. He does not have to do anything but make the people think that he is doing something. I really think that will be a reality. Let's see as the first quarter winds down.........

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