Will 4.5% mortgage rates jumpstart the housing market?
It seems like everyday the folks in Washington are rolling out a new plan to fix our economy. The Federal Reserve is running out of room to cut their federal funds rate, so now the news reports that the Treasury is planning to forcibly cut mortgage interest rates to 4.5% on new mortgages. The details about the plan still remains unclear, but will this boost the sagging housing market? Also, how could this help you as a consumer?
First, it is unclear if the 4.5% interest rate can be applied to refinancing a mortgage. From the sound of the CNN article the 4.5% rate would be available to those who try to refinance, but a new article in the Washington Post states that the dirt cheap mortgage rate would only be available for new loans on home purchases. If this is only available for new home purchases then it would not help anyone with unaffordable mortgage payments.
I think this artificially depressed mortgage rate could help people that have capital to buy a home, but it could also artificially prop prices up so that the benefit a potential homebuyer could receive gets cancelled out by the inflated price. The big winners would potentially be investors in real estate that could rent out their homes for returns more than the interest rate they pay, but once again, these are people who already have money and do not need any help.
According to the Census Bureau, the homeownership rate in America is 67.9%, and that means most people are not exactly jumping to buy a place to live in because they already have a mortgage or two. So if these low rates are not made available to the majority of existing homeowners, then there may be more seething anger in the future. Even if the lower rate were offered to everyone, as the CNN article pointed out, many who do not have enough equity in their homes may not qualify for a refinance.
The CNN article seems to indicate that this move is being driven by lobbyists from the home building industry. There is also another more drastic program called "Fix Housing First" that is being pushed by builders that proposes subsidized loan rates of 2.99% on new home purchases made next year. I do not know about you, but this seems like an attempt by builders to prop up the prices of their unfinished units.
In light of this, I guess my only advice to those of you that have not bought a home yet is to keep as much cash as you can because prices are still falling in most of the country and having a significant downpayment and a good credit history is key to qualifying for a mortgage. For those of you that already have a home with an interest rate higher than 4.5%, perhaps all you can do is complain to your representatives later. If it turns out that you could refinance to more than 1% below your current rate, then you could save quite a bundle over the term of your loan.
Some people will definitely profit from all of this price fixing, but odds are these people are not everyday folks who just want a home of their own to live in.