Monday, May 28, 2012

Record Low Mortage Rates Might Hurt New Home Building


I am all for bargains and giveaways but I’m hearing rumblings that the record low interest rate of 3.78% announced last week might be hurting new home sales instead of helping.

Just before the housing crisis began, the average 30 year mortgage rate was 6.7% but this new record low rate actually cuts into bank’s profit margins that either hold the mortgages for new homes or try to sell them to investors.  With these lower rates, the banks are reluctant to make loans especially if they know that they will lose money if they have to start a foreclosure process against a new home owner.  This is why banks are tightening their lending policies.

Even Ben Bernanke, Chairman of the Federal Reserve, said that the “bank’s current standards may be limiting or preventing lending to many credit worthy borrowers.”

Just as low mortgage rates cut into lenders' margins and thus discourage lending, low prices weigh on the housing industry because they discourage prospective sellers, who are reluctant to put their homes for sale for a loss. A lack of inventory, in turn, gives buyers fewer options and makes them less likely to find a home that they want to buy.


When it comes to new home buyers that want to build a home, banks are reluctant to hurry the process along by dragging approvals hoping that the interest rates will go up so they don’t have to lock in rates under 4% for a 30 year fixed mortgage.

Banks need higher interest rates for mortgages and home buyers want to keep the low rates but if something isn’t done soon to encourage non-speculative new home building, our economy may become stalled again. 

With HP and the Post Office getting ready to fire over 70,000 people soon, the unemployment rate looks like it will continue to be stagnant making people reluctant to look for new housing, fearing that they too might be laid off.

2 comments:

Susan Cooper said...

Interesting perspective. It is a catch 22. Low rates can help the ones that want to buy a home while banks reluctantly move forward with these mortgages. It will be interesting to see how it plays out. Susan Cooper

Susan Cooper said...

Interesting perspective. It is a catch 22. Low rates can help the ones that want to buy a home while banks reluctantly move forward with these mortgages. It will be interesting to see how it plays out. Susan Cooper