December 18, 2008 by Administrator
There is a lot of buzz going on about the treasury stepping in and
temporarily setting home financing interest rates at 4.5% in efforts to
revitalize the depressed housing market. However, if home buyers decide
to delay their purchase of a new home for hopes of a government
program, they will most likely be disappointed.
We believe that this program will never happen. On November 25, the
Federal Reserve announced that it would purchase $500 billion in
mortgage backed securities (MBS) from Fannie Mae, Freddie Mac, and
Ginnie Mae. The immediate effect of this announcement increased demand
for mortgage backed securities, and, as a result, mortgage rates
tumbled. In fact, at the time of this post, qualifying borrowers could
get 5.000% on a 30-year fixed mortgage under certain circumstances. If
the government were to up the ante on their purchase of MBS from the
GSE’s, we could possibly see the market naturally move towards a 4.5%
interest rate; thus avoiding the bureaucracy of developing a new
program created by politicians.
Another benefit of the government influencing the market to move
towards a 4.5% interest rate is that this would allow the reduced rate
to apply to refinances as well. If homeowners were able to lower their
monthly payments by refinancing their mortgages, it will lead to an
increase in consumer confidence and consumer spending. Both of which
are essential for our economy to grow.
If homeowners wait for this government program, they may find that home
prices have risen and lending guidelines have tightened (including down
payment requirements). Instead, borrowers should capitalize on
purchasing a home now when they know prices are low, rates are low, and
lending requirements are still relatively loose. And if my hypothesis
is correct, they can always refinance down the road if rates do end up
improving.
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