Slow Housing Market, Great Interest Rates?

September 29, 2006 No Comments »

Housing starts dropped to a three year low last month, and for the first time in 11 years housing prices have dropped. This is based on a median price comparison from year to year data from August 2005 and August 2006. Yet another sign that the economy is slowing, and Bernanke is beginning to corral inflation.

Although home prices only dropped slightly, it is likely the start of what many have referred to as the housing bubble. And it looks like the start of a gradual decline for the next few months, if not years.

So what does this mean for the mortgage industry? Well for one, it means lower interest rates. Because the economy is coming to a standstill, mortgage rates have dropped substantially and will continue to drop so long as inflation is kept in check. In fact, average 30-year fixed mortgages dropped 18 points in the last week, although mortgage application volume was down almost 20% from a year ago.

At first glance this seems like a blessing for the mortgage industry. The return of low rates. Homes will be affordable! Purchases and refinances galore, right?

Just one little nagging problem. Floundering property values. Great interest rates mean very little when properties are overvalued and oversold. The sad fact is that very few people can afford homes at their current sales price, and those looking to refinance are finding themselves in a pickle as appraisals get cut and equity slips away.

The homeowners in the most trouble are those on the now infamous option-arm programs. The very program Business Week ran a cover feature on last month. These loans allow a homeowner to go negative on their mortgage, essentially deferring interest up to 110% of the value of the home. This wasn’t a problem in an emerging housing market. But now that prices are declining, homeowners are finding themselves with a huge chunk of debt and no appreciation to hedge it.

So get ready for defaults, and lots of them, as homeowners struggle to make interest-only payments once the ultra-low minimum mortgage payment option disappears.

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