Housing recovery may be fiction as mortgage rates plummet

Tuesday, May 25th, 2010 By

home construction

Mortgage rates may be low, but that's meaningless unless people want to buy homes. Image from Wikimedia Commons.

As the real estate market has been closely watched, there are numerous indicators to keep an eye on, one of which is overall mortgage rates — the average interest rate charged on a mortgage loan.  Despite a slight spike in existing home sales, overall mortgage rates are staying down. This may sound like a prelude to greater numbers of home purchases. However, coupled with higher unemployment, it may mean a recipe for a longer road to recovery.

Mortgage rates down to historic lows

Industry mortgage rates are down to near historic lows.  According to the Wall Street Journal, it was anticipated that rates would rise after the Federal Reserve stopped purchasing mortgage securities, but that did not happen. Instead of rising to the predicted 6 percent, the rate dropped through the month of May to 4.86 percent.  In fact, by the middle of May, the number of applications for loans for purchasing new homes was at its lowest level in 13 years.  If rates continue to stay this low, people might be able to avoid needing mortgage loan modification.

Unemployment comes into play

The rates may be down at this point, and they are likely to stay that way if demand stays low because of high unemployment rates. According to CNN, it is believed that the spike in existing home sales had everything to do with the first time homebuyer tax credit, and once that expires, there will be less demand.  According to the WSJ piece, even if there are fewer people looking to borrow, those with existing mortgages would do well to refinance now, while rates are low.

The future for housing

For now, it is apparent that demand was temporarily boosted by the tax credit being offered for homebuyers.  The market currently has lower levels of demand, and as demand lowers, so does scarcity and therefore price. However, this lower demand is coupled with more difficult access and less willingness to commit to a mortgage because of the job market. This means that the housing market may stabilize at a lower point, and we may not see a real estate market at previous levels for years to come.

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