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Declining Mortgage Rates


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by bighorse     💰tip   follow   2011 Oct 24, 5:24am  

There are lots of people who seem to be able to afford homes now. But they are not doing so because of an expectation of declining prices.

The Fed has recently gave everyone an expectation of declining mortgage rates. I don't see why anyone would be rushing in to get a mortgage. They will all sit at the sidelines and anticipate rate decreases.

Isn't that counter productive? I expect the next mortgage report to come out with data showing even more decrease in mortgage applications.

Shouldn't they "stabilize" interest rates as they are with home prices?

#housing

Comments 1 - 18 of 18   

1   Â¥   2011 Oct 24, 5:51am  

Actually it makes tons of sense to buy now if rates are going to decline more in the future.

"Shouldn't they "stabilize" interest rates as they are with home prices?"

ceteris paribus, lower rates increase home prices, which is what they want, obviously, since there's an immense debt overhang that will either get paid down, defaulted on, or retired via someone else taking it on.

http://research.stlouisfed.org/fred2/graph/?g=2X9

2   bighorse   2011 Oct 24, 6:15am  

Yeah it's good to lock in the price now and have the possibility of a refi in the future to a lower rate.

But refinancing applications may go down significantly if people in a position to refi are currently holding off for even lower rates.

3   everything   2011 Oct 24, 11:19am  

Gosh, rates have only been going down for the last eleven years, the only thing that is stable is inflation. Everyone who can, and more to come have refinanced already, probably multiple times.

4   thomas.wong1986   2011 Oct 24, 12:52pm  

bighorse says

There are lots of people who seem to be able to afford homes now. But they are not doing so because of an expectation of declining prices.

We had a demand curve shift to the right during the bubble on expectations of future price appreciation, and we are currently seeing the demand curve shift back left, due to future price expectations (declines). As such interest rates may not have the impact many hoped for.

5   bubblesitter   2011 Oct 25, 3:50am  

Bellingham Bill says

Actually it makes tons of sense to buy now if rates are going to decline more in the future.

Then why is that lots of people who bought at higher rates are not able to refi now at even lower rate? Yeah refi but bank will ask you to come with the money to fill in for lower appreciation. Not a rosy scenario as you think.

6   Â¥   2011 Oct 25, 4:04am  

bubblesitter says

Then why is that lots of people who bought at higher rates are not able to refi now at even lower rate?

Rates have been declining since 1983:

http://research.stlouisfed.org/fred2/graph/?g=2Zh

But what happened during the boom/bubble was people getting negative-am and suicide stated-income loans that pushed prices way past sanity.

So, no, people who paid negative-am level prices 2004-2008 can't refi into 4% without the LTV rules being changed.

7   bubblesitter   2011 Oct 25, 4:28am  

Bellingham Bill says

So, no, people who paid negative-am level prices 2004-2008 can't refi into 4% without the LTV rules being changed.

Going back to your original comment about it makes sense to buy now will not work if rates dip to 2% and home prices still go lower.

8   FortWayne   2011 Oct 25, 4:32am  

If I was on the market today I'd stay the hell out. With rates manipulated to stay low to me would signal a bubble. Fed can't keep the rates low forever. At some point the house of cards will fall when all the important peoples money is out of it.

9   bubblesitter   2011 Oct 25, 4:36am  

FortWayne says

If I was on the market today I'd stay the hell out. With rates manipulated to stay low to me would signal a bubble. Fed can't keep the rates low forever. At some point the house of cards will fall when all the important peoples money is out of it.

Quality Auto Repair Since 1979

I agree. Some how the notion that Fed will always hold the card on rates and it will be like that forever does not make sense. It'd get pretty ugly(for home prices) if the rates turn around and good for the economy and the country,contrary to what most guys at Fed and government thinks.

11   tatupu70   2011 Oct 25, 5:22am  

bubblesitter says

It'd get pretty ugly(for home prices) if the rates turn around and good for the economy and the country,contrary to what most guys at Fed and government thinks.

History proves otherwise. I've asked this before, but what do you guys think rates would be minus any Fed intervention?

12   corntrollio   2011 Oct 25, 5:36am  

tatupu70 says

History proves otherwise. I've asked this before, but what do you guys think rates would be minus any Fed intervention?

Actually, if you assume boomtime spreads (i.e. artificially low spreads) of about 1.6%, and the 10-year T-bond is at today's rate of 2.1280%, you get 3.728% for mortgages. If you add another 0.6% or so, to get a slightly higher spread of 2.2% (which may have been roughly the spread in 2000), you get about 4.3280%, which is fairly close to what the rate is now.

The spread represents the risk premium that banksters want. During the recent boom, banks lowered their spreads. Current spreads are higher right now.

However, IMO, the risk is actually higher right now than spreads indicate, as evidenced by the fact that it takes as much government-backing as it does to get mortgages down to those rates. The direct, indirect, and priced-in implicit subsidies (e.g. for TBTF) by our government overlords is keeping rates down quite a bit by reducing risk to banksters.

That said, there is no direct correlation between housing prices and interest rates. However, some would argue that we are far into the low interest rate side, which is propping up prices quite a bit. If that stimulus were gone, it's possible prices could drop. It's also possible that the economy would improve, wages would go up, and prices could go up for that reason. But it's hard not to notice that a $625K mortgage at 4% has the same payment as a $371K mortgage at 9%.

13   TPB   2011 Oct 25, 6:09am  

corntrollio says

But it's hard not to notice that a $625K mortgage at 4% has the same payment as a $371K mortgage at 9%

Except your additional prepayments, and refis goes a lot further on that 317K mortgage.

14   bubblesitter   2011 Oct 25, 6:19am  

The GOP says

Except your additional prepayments, and refis goes a lot further on that 317K mortgage.

Haha. Most people on the side of lower interest rates don't get this.

15   tatupu70   2011 Oct 25, 6:27am  

bubblesitter says

The GOP says



Except your additional prepayments, and refis goes a lot further on that 317K mortgage.


Haha. Most people on the side of lower interest rates don't get this.

What does that even mean? Who is on the side of lower interest rates?? I didn't even know people were choosing sides.

The fallacy is in the false choice. There is no reason to believe that prices will fall when interest rates rise. Historically it doesn't happen.

And we all know why--historically mortgage rates rise with (wage) inflation. And wage inflation causes home prices to rise.

16   corntrollio   2011 Oct 25, 9:11am  

The GOP says

Except your additional prepayments, and refis goes a lot further on that 317K mortgage.

Yes, very true. I've stated this on other threads. It's a lot easier to pay off the $371K mortgage early than the $625K mortgage, even if both are 30-year fixed.

People recognize that it took them a long time to save 20% down ($156K for the $625K loan), but ignore the fact that if they want to pay the house off in less than 30 years, that it could take a lot longer to pay off the extra principal if you want to pay the house down early.

In addition, yes, you can't really refi too much when your rate is already 3.x%.

tatupu70 says

The fallacy is in the false choice. There is no reason to believe that prices will fall when interest rates rise. Historically it doesn't happen.

And we all know why--historically mortgage rates rise with (wage) inflation. And wage inflation causes home prices to rise.

Whoa, hang on there. Mortgage rates don't have a positive correlation with prices either, do they? I've never heard that.

17   tatupu70   2011 Oct 25, 9:49am  

corntrollio says

Whoa, hang on there. Mortgage rates don't have a positive correlation with prices either, do they? I've never heard that.

No--I didn't mean to state that. There is basically zero correlation, as you said earlier. I was just trying to explain (my opinion) as to why there is no correlation.

18   you pay for my stuff   2011 Oct 25, 1:26pm  

Of course prices won't drop from an increased interest rate.

It just means people will have to save up 4x as hard for down payment after the Fed wakes up one morning and decides to not help mortgages anymore.

Interest rates are lower than they should be because it's on crack. Remove the crack and see what happens. Your opinion on rising interest rates not being correlated with home prices is true if we weren't on the crack. But we are.

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