Mortgage Rates Hit All-Time Low, Does Not Help Slide In Home Prices

Average interest rates on fixed 30-year fixed-rate mortgages have fallen to an all-time low of 4.37%, according to Freddie Mac’s weekly survey of conforming mortgage rates.

The drop in rates clearly has done little to improve either home sales or home prices. The latest Case-Shiller data show a less than modest up-tick in home prices in their 10-market and 20-market studies. The drop from 2006 is still breathtaking.

Prices have been further depressed by sales of homes foreclosed on by banks. RealtyTrac announced today that 24% of home sales in the second quarter were foreclosed homes. The value of these sales was 26% below prices for comparable homes not in foreclosure. The inventory banks put on the market is likely to increase. Industry experts believe that the “shadow inventory” of houses owned by banks but not yet put on the market is 2 million units.

Banks also face the difficult problem that the sales of homes in foreclosure depress the prices of houses in the same areas. This pushes more and more mortgages underwater and puts banks in the difficult position of increasing the risk in their overall mortgage portfolios by clearing out their backlog of foreclosed inventory. There are more than 11 million home loans underwater now–nearly a quarter of all US mortgages. Further drops in home prices, which are likely to be exacerbated by the sales of houses at below market rates, will encourage strategic defaults as homeowners turn in the keys to houses in which they believe they will never have any equity.

The drop in interest rates, in other words, has done nothing over the last three years to stimulate sales.

Douglas A. McIntyre