Falling Mortgage Rates or Falling Home Prices: Which Matters More to Buyers?
The housing market is down, but not out.
It takes an experienced economist (or dozens) to discern whether the beast will succumb or come charging back. And in charting the course for the next two years, it may hinge on which matters more to potential buyers:
- Falling mortgage rates (a big positive).
- Fear of falling home prices (a big negative).
According to MSN and Business Week, housing construction is clearly in a localized recession. On November 17, the Census Bureau announced that starts on single-family homes fell 14.6 percent in October, to the lowest level since July of 2000. On top of that, building permits have fallen 6.3 percent to the lowest level since December 1997.
But that’s not the end of the story.
Buyers could still save the housing market, depending on how they react to current economic conditions. Mortgage rates, after rising at the beginning of this year, have dipped in recent months, from a peak of 6.8 percent on average for 30-year fixed-rate mortgages in July to 6.24 percent last month.
There’s even speculation that the Federal Reserve could cut rates in the months ahead, if inflation is under control and the economy stumbles. If buyers take heart from the decline in mortgage rates and step up to buy, the inventory backlog will shrink quickly — especially with the production of new homes having abruptly fallen. That would put the market back on sound footing within a few months.
However, if customers decide that real estate is effectively “dead money” because prices are going to flatten or decline for an extended period, then no tinkering of rates is going to make them to part with a down payment.
Economists are sharply divided over the prospects for housing because they disagree over how potential buyers will react. The bears think the prospect of further price declines, or at least a lull, will scare away buyers. During the boom, he says, people were effectively being paid to buy homes because the annual appreciation they got was greater than the interest on their home loans.
That is no longer true.
But economists who are more bullish say buyers don’t seem to be frightened despite the flood of bad publicity about housing. They point to the recent resilience of demand. The Mortgage Bankers Association announced that its seasonally adjusted index of mortgage applications rose 2.7 percent in the week ending November 10, to its highest level since July.
And people are putting those mortgage loans to work: Sales of both new and existing homes are up from their summer lows.
The housing slump is far from over, but conditions for an eventual recovery are in place as home builders are sharply cutting back and buyers are - cautiously - continuing to buy. That means the backlog of unsold homes should begin to diminish.
The welcome decline in mortgage rates may be small compared to the reversal in price trends, from soaring to sinking. But it appears enough to put at least some people back in a buying mood.