December 1, 2011

Even low rates could not stimulate the mortgage market

 By: Alex Brown

When everyone started to believe that the country has weathered the storm of the financial crisis that had its roots in the housing market, problem has again erupted in the housing market. In early October 2011, mortgage rates in the country declined to the record low levels. Freddie Mac, the leading mortgage lender in the country, has reported that the most representative mortgage rate, that is the average rate for a 30-year fixed loan, declined to its lowest level of 3.94% in early October.

Rates on 15-year fixed rate mortgages, which borrowers prefer as a refinancing option, also touched the record low of 3.28%. US President Barack Obama, who is battling many serious macroeconomic crises, predicted that it would “Probably take this year and next year for us to see a slow appreciation again in the housing market.” But, currently the housing market in the country is likely to witness a lull, despite very low mortgage rates. The low mortgage rates in the country can be attributed to the declining confidence in the economic outlook of the country. This has resulted into borrowings very cheaper. This is particularly so because demand for borrowing declined dramatically. Even a year ago or so, when the economic outlook was not as bleak as it is now, mortgage rates were not sky-high too. Home sales were also at a very low level during those periods. The same trend is continuing now also. The aftershocks of the housing market crash of 2007-08 have not been eliminated completely. Lending institutions in the country are now very vigilant and are scrutinizing loan applications very rigorously than ever before. The political doldrums in the Middle East, Euro crisis, the catastrophes in Japan and of course the acute debt crisis in the country itself are not doing any good to the insipid activity in the mortgage industry in the country. The decoupling theory has been proved wrong once again. And the mortgage rates are closely linked with the overall conditions of the US financial markets, which in turn is again linked with the financial markets around the world. Moreover, recent global unrest has led to widespread sell off of stocks and investors flocked to the safer form of investments. In other words, investors have put in their money into the safe haven of treasuries and bonds. This has invariably resulted into lower yields on these safer investments. This has, in turn, been reflected in the declining mortgage rates. Anyways, low rates are good news for the people who can afford to buy home or are in a position to refinance. But in actual practice, low mortgage rates have done very little to bolster the confidence in the sagging housing market. Mortgage rates track the yield on the 10-year Treasury note. Ailing US economic outlook has led many investors to shift money from stocks to the safer haven of bonds. This has resulted into Treasury yields to reach historic low levels and same has been the case with mortgage rates. Theoretically, low mortgage rates should provide a boost to the troubled housing market. Though the mortgage rates have been below 5% for nearly 2 years but these did not result into improved home sales. Whatsoever, many people can’t take advantage of low mortgage rates because of the tight lending conditions. Banks and lending institutions are now insisting on larger down payments and higher credit score. This persistent weakness in the housing market and US unemployment rate of over 9% are likely to keep a lid on the refinancing activity despite the ambience of very low mortgage rates. The truth is that though lower rate of interest can help borrowers to save more but it does not at all make the borrowers eligible for the mortgage loans. Whatever be the rate, the borrowers have to pass through the stringent lending conditions stipulated by the lending institutions. Moreover, low rate do not at all alter the negative equity of the borrowers on house and it does not help the borrowers sail through the crude realities of the mortgage world. Whatsoever, many experts are of the opinion that the low rates scenario is temporary in nature. This may be the climax of the low mortgage rate episode. In fact, the yields on the 10-year bond are edging up slowly and gradually. Moreover, with recovery in the global economic situations, the rates are likely to come to the normal levels.

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