By: Dennis Norman
For the eighth week in a row, the interest on fixed-rate home loans has fallen according to the Primary Mortgage Market Survey released this week by Freddie Mac. The survey shows interest rates for a 30 year fixed-rate mortgage have dropped to an average of 5.14% nationwide, down from 5.19% the week before. This is down from 6.17% a year ago and the lowest the rates have dropped since Freddie Mac first began the Primary Mortgage Market Survey in 1971.
The region of the country with the lowest rate is the North Central region where rates averaged 5.08% and the highest region was the Southeast Region with a rate of 5.23%. The average cost in fees and points was 0.8% meaning on average a borrower would be charged about $800.00 in points and fees for every $100,000 borrowed.
Unfortunately even with the historic low interest rates the housing market is still struggling. Earlier this month I wrote a post about efforts by the National Association of REALTORS(R to stimulate the housing market by recommending to members of Congress their 4 point plan which included the Treasury buying down mortgage rates to 4.5%. I think, while lower interest rates certainly help, it is going to take a lot more than that to get us out of this housing slump.
One thing that appears to be working is lower home prices. In a post earlier this week I reported on the existing homes sales data released by the National Association of REALTORS(R). In that post I pointed out that the West region of the country had the best sales numbers, being down only about 4% from the prior month and actually showing an increase in the number of homes sold for the year. I credited that to the median prices dropping over 25% in the past year. So lets use the West region to illustrate my point. One year ago the median home price was $325,400 and the average 30 year fixed rate mortgage was at 6.17%. Since prices have now dropped 25% and the sales pace is starting to pick up I think it is safe to say that a year ago the prices were just too high for the market.
Lets imagine the Treasury decided a year ago to do the interest rate buydown to 4.5% now being suggested. A buyer in the west buying a median priced home (and to make it simple financing 100% of the cost) instead of having a mortgage payment (principal and interest) of $1,987.00 per month at 6.17% could of had a payment of $1,649.00 at 4.5%. This is a significant savings per month however if in fact the house was overpriced (as time as shown it was) then the lower payment won’t mean much to the buyer when they go to sell it unless they live there long enough to get the loan paid down to the real, unsubsidized, “value” of the home. If we use the current median price for the West of $242,500 then a buyer in the previous scenario would have to pay on his or her mortgage for 12 years before the loan balance was finally paid down to the “value” and the buyer was no longer underwater.
Now let’s look at what may have happened without an interest rate subsidy but instead home prices being reduced to the point that they stimulate buyers. In the scenario above if prices were reduced to where they are now a buyer paying the current median price of $242,500 would have a mortgage payment of $1,481.00 at 6.17%. In other words the buyer would be paying almost $200 per month less than the buyer above with the subsidized interest rate and, more importantly, would owe $83,000 less on his or her home and not be underwater.
I realize my example is not entirely scientific as there are other factors I’m not covering but the point I’m trying to illustrate is if in some areas of the country homes are still priced too high, subsidies are not going to be anything but a band aid as eventually the market place will dominate. The auto manufacturers have proven this…even with 0% financing and all the other subsidies they still won’t sell cars until buyers feel they are worth the price. Same goes for houses.