Thursday, September 11, 2008

Mortgage Rates Are Falling! Will It Be Enough To Save The Market?

Mortgage applicationAs most people know by now, the government has seized control of Fannie Mae and Freddie Mac. While seizing any company comes as a bit of a shocker, in this instance it was not completely without warrant. One of the nice ramifications of the government seizure for homebuyers is that interest rates have fallen substantially, down around 0.5 percent so far. This translates into almost $100 a month in savings on a $300,000 loan. Savings like this could have an obvious impact on the real estate market.

The fact that people can now buy more house for the same monthly payment is definitely helpful for the market. As we learned in the housing boom, people don’t pay attention to the price they are paying for the house, but rather their monthly payment. This dynamic has likely changed some as people have become more cognizant of the fact that housing prices don’t always go up, but I would still venture to say that the monthly payment is still the primary focus for most residential home buyers.

The tricky thing with this new lower conforming rate is that a good portion of the population isn’t going to qualify. The new lending environment has changed greatly from a few years ago. It used to be that practically anyone could get a mortgage, but that just isn’t the case anymore. Credit score requirements are higher and income qualifications tighter. The net effect in all this is that fewer people can buy homes. Let’s now take into account the record levels of debt and late payments; one could venture to say that credit scores across the population are not as good as they could be. Again, this is a bad sign and it appears to only be getting worse.

The government appears to be pulling out all the stops to fix this housing problem. The new Housing Bill initiatives will become effective October 1, and they include several measures which should provide assistance to the market. Will lower mortgage rates and the Housing Bill be enough to right this failing market? Will job losses continue to increase and economic hardships make matters worse?

I don’t have the answers, and I don’t think anyone truthfully does. There are so many variables at play here that the best predictions are sure to be wrong. We will have to wait and see how this all plays out. As an investor, my advice to you is to stay diversified and keep a good portion of your funds in cash equivalents. This will allow you the flexibility to pounce on great opportunities when they present themselves.

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