Mortgage rates have dropped dramatically in the last week or so. Currently with good credit scores we are seeing a 30 year conventional mortgage at approximately 5.25% give or take. This is a very low rate based on historic levels. The big question is why have rates dropped, and what will they do in the future?
The reason for the recent drop in rates is that the government strongly believes that the housing market is a crucial component to the recovery of our economy in general. Thus the fed said on Nov. 26 that it would purchase up to $500 billion in mortgage backed securities from Fannie, Freddie and Ginnie Mae. This has resulted in a doubling of mortgage applications, however a large percent of this activity is refinance. The goal is to drive mortgage rates to the 4.5% level. This remains to be seen and time will tell.
The hope of this move is to get home buyers out and actively purchasing homes, and would absorb some of the supply of inventory of homes out there. This will take time however is not a ‘quick’ fix. I personally believe that time is the best solution to some of our economic mess, rather than too much government intervention.
A drop in home prices may be the best solution to the housing crisis. This will make homes more affordable and again help reduce the inventory. By lowering interest rates, it will artificially keep the price of homes higher, and thus slowing down the price decline that may be the best solution in the end.
The other danger with the governments initiative is how much can the governement and thus the taxpayers ultimatly afford? With all of the bailouts and money being pumped into the economy the risk is that foreign investors will be wary of our sky rocketing national debt, and stop investing in the dollar. The declining value of the dollar opens up another can of worms.
None of our economic troubles and housing issues are going to be solved easily and quickly and I certainly don’t have all the answers. One thing I do believe is that owning a home for the long term is and always will be a great asset to own. If not purely for investment purposes, it still provides shelter which is a basic need that will never go away. That being said, this is an awesome time to take advantage of some historically great interest rates!
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