Pushing Mortgage Rates To Zero Won't Help Housing

No one can remember mortgage rates as low as they are now. The thirty-year rate is at 4.85%.

Mortgage rates could go to zero and it would probably not help the housing market. One obvious problem is that lower rates do not improve people’s credit ratings or access to cash for down payments, but the trouble is more complex than that.

While some data shows that housing may be finding a bottom, it is likely that very few people are willing to gamble their own money that the perception is true. If unemployment rises, housing prices could continue to fall. If foreclosures rise, the value of homes could tumble anther 10% or more.  Of course, people thinking about buying a house have to be concerned with their own jobs. Low mortgage rates don’t matter to the unemployed.

The Fed has effectively taken rates to zero, and banks have not reacted by lending. They are still concerned that consumer credit defaults, LBO failures, and commercial real estate values could cause large write-offs as the year wears on. Interest rates at zero are only attractive if the risk of borrowing is at a traditional level. And, for people looking at homes, it is not.

Douglas A. McIntyre