Low Mortgage Rates Should Stimulate Home Market, But Do Not

The rate for 30-year fixed mortgages dropped to 4.01% this week. That is the lowest figure on record. A current home buyer could save tens of thousands, if not hundreds of thousands, of dollars in interest over 30 years compared to when rates were 7% or 8%. But almost no one who might buy a house cares.

What better incentive to buy a home could there be than the financial advantage of a 4% mortgage rate offers? The benefits should offset any drop in home value if real estate continues to sell off over the next year or two. At some point, home prices should rebound so that the value of a house doubles over a three-decade period. It has worked that way for decades — at least back to the 1950s.

The home market is so badly damaged, and is likely to be so for many years, that possible buyers cannot be turned into believers. This is probably so even if mortgage rates were at zero. The most recent home sales, housing starts, housing permits and foreclosure data indicate that the depression in sales could continue for years. This is particularly true in markets where values have dropped 50% or more and where inventory could take years to clear at present sales rates.

The other major problem with the home market is the most obvious one. Nine percent of people are out of work, and many more employed persons fear for their jobs. Those things together take millions of potential buyers out of the markets.

It should be that prices and mortgage rates are perfectly aligned to restart the home market. That this has not happened is a sign that buyers may not enter the market in force any time soon, not until circumstances significantly change.

Douglas A. McIntyre