Here’s what we think…
The government remains confident that it can influence the market to bring down the mortgage rate to 4.5 percent. The most popular 30-year fixed mortgage is currently set at 5.70 percent, (up by 0.66 a week ago) while the 15-year fixed loan is at 5.40 percent, (also up by 0.04 from the previous week). However, it is not a question of whether the government is capable enough to achieve such low target rate to create more affordable loans for buyers or not. With the degree to which the bail out plan is going, we expect that such number will only be met during the first half of next year. What concerns us, is if the market will be able to sustain such a rate and prop up home buying again.
Since home values are driven by the basics of supply and demand, today’s bargain prices may soon rebound if potential borrowers cease speculating when mortgage rates will finally reach bottom. The recuperated homebuyer demand will slowly diminish the available housing supply and stabilize the median home price back to its pre-crisis level in the long-run. It could then adversely adjust affordability levels and leave out those with lower income and high debt-to-income ratios.
Appeal vs. Approval
Lower rates may be appealing to borrowers but not all applications necessarily translate to approval. With more stringent borrower qualifications set by a tighter credit market, only a few borrowers can receive the needed loan. As an example, last week’s 112.1 percent rise in mortgage applications suddenly plummeted by 7.1 percent. A lot of homeowners were caught in the media frenzy after all. Indeed, many are called (to borrow), but few are chosen.
Company Chopping Board
November’s massive lay offs reached 533,000 and next year, more companies are slashing the number of their workforce and scaling back working hours to stay in the industry. If the pink slips continue to come, the economy would further shrink and lead to higher foreclosure rates. This could lead to added growth in housing supply and exacerbate the present mortgage problems that we now have.
So is 4.5 percent possible to achieve? Yes. Is it sustainable? We highly doubt it would be.