Impact of Lowered Interest Rates on the Housing Market

Over the last few months, some real estate detractors have contended that high mortgage interest rates are placing a drag on the housing market recovery. These so-called 'high rates' however, were in the 6 percent range, which by historical standards is still quite low. But will a drop in interest rates — with or without government intervention — be the impetus needed for a turnaround in the housing market?

In my humble opinion and the opinions of many industry experts, a rate decrease by itself will do very little to pull the market out of the gutter. Just last week, the Federal Reserve announced with great fanfare, a plan to purchase $500 billion of mortgage back securities that have been backed by Fannie Mae and Freddie Mac. The action was seen as a way to unfreeze U.S. credit markets and spur new home and general consumer spending. After the plan was announced on Tuesday, the average mortgage rates on a 30-year fixed-rate loan fell nearly half of a percent, although some of this decrease was given back last Wednesday.

Impact on housing market
In a recent Wall Street Journal article, contributor June Fletcher, argued that the move will have a negligible impact on the U.S. housing market. In many markets across the country, including here in the Chicago metro area, house-for-sale inventories remain at near record highs, median prices are tumbling (in excess of 10 percent in the past year in the city of Chicago alone), and underwriting rules for new mortgage loans have become increasingly stringent, especially for those without top credit scores and low down payments.

Fletcher feels lower average rates would only help if prospective home buyers were 'confident in their financial future to take the new-home plunge.' But thousands of consumers across the U.S. are increasingly buried in personal debt, as well as their own mortgage debt. As unemployment rates continue to increase across the country, many home buyers will be wondering if a major financial investment is wise decision right now. Here in Chicago, I'm seeing many qualified buyers standing on the sidelines, waiting for housing prices to fall even further.

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