Update on Home Mortgages

Thanks to the Federal Reserve, the benchmark interest rate will remain near zero. LIBOR remains around 1.17 percent. Home prices in twenty American cities dropped 18.2% in November from the prior year (this rate is lower for areas below the conforming mortgage rate of $417,000). Mortgage rates are at about 5.48% in the last week. What does this mean for home buyers? For mortgages? As we've said here before, the indicators suggest mortage rates should be lower than ever leading to more people buying homes and refinancing (see More Trouble For Home Refinancing; Refi No Good --- A Lesson in "LTValuation").

So, what does the mortgage news really mean? There is talk that the Senate will include housing relief in the economic stimulus plan. The discussion includes: (1) making available to home owners a 4% 30 year mortgage, either for buyers or refinancers; (2) increasing the first time home buyer credit; and (3) a ninety (90) day moratorium on foreclosures. Yippee! At least for my home, lenders cannot do too much better than the mortage we already have. So, the strategy for some home owners is shop around for better rates and wait. As much as I might like to see a 4% mortgage rate, though, the cost of this housing relief may become quite expensive. The cost for such a government program hasn't yet been publicized, but is likely to be the impediment to my dreams of a 4% mortgage rate.

Home purchase credits might help to encourage those who have been staying out of the market to buy a home. The structure of the credit needs to have the effect of home purchases by those who would not purchase otherwise. Timing and limits on eligible purchasers are also issues. Moreover, the word of caution with encouraging home purchases is avoiding the same problems that led us to the current crash. That is, to what extent should we encourage purchases of homes if some purchasers would not have their downpayment but for the credit? The same concerns about lenders repeating policies that created the housing crisis apply to home buyers. Throwing money at the housing crisis may well help in the short to medium term, but the stimulus plan should not forget the lending and borrowing implications for the longer term.

As to moratoriums on foreclosures? There are many open questions on the housing crisis. A little more time is probably warranted.

— JSM