Record Low Mortgage Rates and the U.S. Housing Market
Despite historically record low mortgage rates, the United States Housing Market continues to struggle. The Federal Government recently announced an initiative called Operation Twist, which consists of the government selling off short-term treasuries in exchange for buying an equal amount of longer-term debt. Operation Twist, along with other factors due to the country’s current economic state, caused average rates on long-term interest mortgage rates to drop to a record low – the lowest since 1951.
Low mortgage rates are doing little to stimulate the housing market because most of the people who can afford to purchase a home or refinance their homes have already done so. Additionally, many Americans are already in default on their mortgages, are facing foreclosure, or have already had their homes foreclosed by lenders.
Due to the fact that many Americans cannot afford to purchase a home even with record low mortgage rates, single family home construction is also at a record low, with 2011 being the worst year on record for single family home construction. According to the National Association of Home Builders, single family homes account for roughly 70% of the housing market and are therefore critical in terms of a housing rebound. Additionally, each new home that is built creates an average of 3 jobs and roughly $90,000 in taxes, so the lack of building not only negatively affects the chances for a housing rebound, but the economy as a whole.
According to the United States Commerce Department, the sales of new homes last year were the worst on record dating back to half a century. As previously mentioned, most people who can afford to buy a home have already done so, and a significant portion of Americans are already in default or foreclosure. For those that are able to buy homes, previously occupied homes are a more attractive option because the cost is much lower than buying new.
Bank of America announced last month that they will begin reducing homeowner loan debt for about 200,000 homeowners, by as much as $100,000 in some cases. There are other programs designed to provide assistance to those in mortgage default, such as Fannie Mae’s Home Affordable Modification Program (HAMP). Despite offers from lenders to reduce debt and available programs to assist those in default, many homeowners in default are choosing to simply “walk away” from their debt. When faced with the choice of paying a mortgage company way more than their home is worth and thus being unable to afford other basic costs of living, many people are opting to simply not pay their mortgages and use their money instead to pay their other bills and expenses as a measure of self-preservation. This, in turn, is creating a class of people who may never again be able to attain a loan for the purposes of buying a home, because they felt forced to do irreversible damage to their credit in order to survive.
All of these factors show that record low mortgage rates are doing little to restore the housing market to a healthy state. Although there have been occasional very slight increases in refinancing applications, experts predict that there is still a long, bumpy road ahead in terms of the housing market and that the recovery of the housing market is not going to happen anytime soon.
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By Nicole Galloway, Assistant Account Executive, Real Estate Department
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