4.5% interest rates should clear the matter up

Under the plans-that-don't-make-a-lot-of-sense category (which is bulging to overflow these days) ... handing out 4.5% interest rates to people who may not really need them. Reports out late Wednesday included this on CNNMoney.com:

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

More from the Associated Press on latimes.com about the proposal, which would drop rates by about a percentage point:

"The goal is [to] drive mortgage rates so low that home prices not only stop falling but begin to rebound," said Greg McBride, senior financial analyst at Bankrate.com.

Though the plan, if enacted, would help anybody looking to buy or sell a home or refinance out of an expensive mortgage, it may not help those whose credit is so damaged that banks don't want to lend to them.

"It may change the number of borrowers seeking loans, but it won't change the qualifications for who gets those loans," McBride said.

OK. So remind me again how this makes things better.

--Lauren Beale

Thoughts? Comments?

Comments

[Lou]

This is such a joke. All the gov't is trying to do is inflate home prices again. There is an inverse relationship between rates and home prices. So keeping rates artificially low makes home prices artficially high.

[NewtoLA]

"Running the calcualtor, for a 700k house w/20% down, a difference between 4.5% and 5.5% is about $390."

700k with 20% down is still a jumbo. These rates still hover at 7 % today, not 5.5 (if you can find me a no point 5.5 jumbo I'll buy a house with it tomorrow!). My calculator says that the difference between 7% and 4.5% is about 900 dollars/month. Let's assume for a second that instead of taking the 700k at 4.5% I wait for the house to drop by 20 percent. Assuming the 4.5% is temporary, the 530k house at 7% is only about 900 dollars cheaper per month compared to the original 700k at 7%.

So why exactly would I wait for the price to drop when I can get it for that price today? You might argue that at 530k I can put a little more down to get a better interest rate, but really where will interest rates be in the time it takes that house to drop by 20 percent?

[NewtoLA]

Drew I think you make an excellent point about people moving into a neighborhood having more money than the people who live there. This is exactly what worries me about being able to afford a house in some of the west side communities. However, I think that your argument loses weight when you apply it to the whole region. If socal salaries haven't grown at the same rate as houses of ther last 5 years (and they haven't). Then you need new people from outside of socal with higher salaries than those in socal in order to prop up prices.

I'm one of those people, our family income is about 4-5 times that of the LA median and we can't afford a decent home in a neighborhood that won't force me to drive a couple of hours a day. But, we can afford to rent one.

You're right that some people will spend more of their salary on a house than others, but I think this would be less true when the house value is expected to decline rather than increase as is happening today.

[Lauren Beale]

Dr. Housing Bubble has done some math on what the 4.5% interest rate would mean. He says, "Not going to help at all. In fact, it will hurt the market." In a nutshell, homes will become overpriced again. Here's the link: www.doctorhousingbubble.com/siiv-super-ignorant-investment-vehicle-the-evolution-of-progressively-dumber-and-dumber-bailouts-3-emerging-trends-bailouts-getting-costlier-and-dumber-layoffs-accelerating-and-embracing-fru/

[Drew]

Hey NewtoLA, I'm glad at least one person got what I was trying to say.

I agree that this theory may not hold up when looking at the entire region -- but I'm not interested in the entire region, just certain parts of it. The more "micro" and less "macro" you get, the better this theory might hold.

I'll tell ya, though, I make about 3x the median LA income, and can afford what I consider to be a nice house in what I consider to be a good neighborhood.

Hint: Avoid the Westside like the plague. It has always been overpriced and always will be.

[Laker]

Simpson, You wrong on this. Big time.
"....doesn't it make the MOST sense to extend this rate to Re-Fi's of existing (particularly sub-prime and interest only loans) ...."
So why don't we give all the subprime buyers of 2006 free house for life just to reward them for buying in 2003-2006. All their mortgages would be paid by tax payers. Then Add extra house tax to all tax payers and special double tax to renters so they can sponsor all deadbeats, speculators, and fraudsters that lied on their loan applications.

Also you say: "...Most of those people CAN afford to make their original payments forever (if they don't lose their jobs in the economic downturn) which is probably about what payments on a 30-year fixed @4.5%.

Correction my friend, those people were paying minimum payments on Option ARMS. That is less than full amortized payment. Many of the option ARMS were teaser rates of 1-2%. Switching these to fully amortized 30 year fixed at 4.5% means they would pay almost double their previous subprime Option ARM loan minimum payment.

[Bill]

I'll tell you EXACTLY why this is not only a good idea, but probably the BEST idea yet.

IIt will naturally limit the ability to get a 4.5% loan to PEOPLE WHO CAN AFFORD IT. That would be people who were bright enough to not overbuy during the housing bubble and/or are prudent enough to SAVE THEIR MONEY.

Me for example. I've rented since I moved to LA in 2003 and have been waiting until 2004 to buy. It was obvious then that prices were out of line. So I've waited, worked and SAVED and now my wife and I make much more than in 2004 and have plenty for a downpayment on a house in a nice area of LA.

This plan would also reward people who stayed in their house during the bubble and didn't overbuy as well as those who have been prudent with their savings AND can now qualify under the more rigorous lending standards.

Since they are likely the lowest risk group by far they should be the ones rewarded with a lower than normal mortgage rate!!!

BOTTOM LINE
1. This rewards good behavior not bad.
2. This provides an incentive for those with the means to put their money back into the housing market.
3. This will create a trade up effect that will help put a floor under housing prices and a floor under this failing economy.
4. This will indirectly benefit the subprimers and other losers because it will stabilize prices.

Its the only thing I've heard in the last 3 months that makes any sense!!!

[NewtoLA]

Drew. I hear what you are saying about micro level analyses, but it is hard for me to picture a scenario where a few neighborhoods are unaffected by this downturn/correction. Rather you are likely to see a scenario where all prices come down, but relative differences remain unaffected. On the westside this means SM will continue to be more expensive than Mar Vista. If this is your point then I completely agree, but I just don't see how in the face of this much decline in overall prices how one or few communities won't also lose a great deal of value. You have to admit that the potential buyers can't get financing and that if only one community holds value people will substitute to less expensive but comparable options.

[NewtoLA]

Drew I don't want to beat a dead horse, but you wrote in your original post

""housing payments cannot be more than 28% of income" may be sound financial advice -- but do not take in the realities of consumer market decisions that include a willingness to pay 50% or more of income on housing, something that many people do.

The problem today is that you can no longer do this--you just won't get a loan for 50% of your salary--Thus there are fewer buyers and fewer buyers means lower prices.

[RM]

Bill, you are not alone in your assumption, in fact many on wall street who have decided to take on some some risk with the market agree with you. But whether it happens or not is something else. I don't know all the specifics but it seems to me that a 4.5% on a 15 year fixed and a 5.25% on a 30year makes good sense, specially since the government is getting so much money thrown at it from investors fleeing the stock markets that rates have been pushed way down. Besides the government has a huge vested interest in housing through the large sums of taxes that it collects on property taxes and the boost to the economy that it gets from a healthy housing market. After all, how many more months of half a million lost jobs per month can we take before we go into another depression.

[Drew]

I'm not saying that no neighborhoods will be unaffected.

I am saying that median housing prices will never go back down to 3x median income. That's region-wide.

And there will always be a disparity in income-price ratios between different neighborhoods. A 3-4x ratio in one community might be matched by a 6-8x ratio in another.

[Krista]

Maybe I'm new at all this, but I am a teacher who could not buy a home in my area (Northern California) until the market went down. Now, I can afford to buy one and with a 4.5 interest rate, I'd be stupid not to! Housing prices will go up. It's a cycle. Who cares if I bought it when the price was low, I'll hold it and not sell until prices are high. That is what good investors do.

[NewtoLA]

I am saying that median housing prices will never go back down to 3x median income. That's region-wide.

I think by definition they have to as an average for the region. But, I think many on this blog are waiting for prices to get down to 3x year 2000 median income--which may not happen.

And there will always be a disparity in income-price ratios between different neighborhoods. A 3-4x ratio in one community might be matched by a 6-8x ratio in another.

I agree

[Doug Capella]

Well, it would benefit me because I actually have good credit and bust my butt to pay my bills on time and regularly. How about we stop funding Planned Parenthood at the tune of 300 million a year, end welfare programs which benefit the lazy and reward thoso who try to do the the right thing instead of creating an aura of mediocrity.

[MichaelP]

I can tell you for a fact that right now in certain cities there are people bidding at asking price and higher on properties. And I'm not just talking about one or two offers per property I'm talking about 10 or more. I've been outbid on 4 properties that I liked in the last 4 months. Finally got lucky. I wouldn't wait to long, as I can only imagine the amount of people sitting on the sidelines now. The question is when will these 4.5 rates be available? I"m stil waiting to lock in my rate.

[Rock]

I am very interested in the 4.5% interest rate. I have been hearing about this from people I work with. We are all waiting until the interest rate drops so we can refinance or buy. We just bought a house about 6 months ago and would love to refinance. The more I save, the more I can afford the luxury's of life, such as a boat, furniture etc...I believe this will free up people so they can help the economy, in so many other ways. I realize that some people can't do this, due to their credit, but not everyone's fault. You should know what you can and cannot afford before you sign papers that the banks put out in front of you, to me that is common sense. Some people did this to themselves! I will take advantage that will help me and my family and that will be an incredible savings going 4.5%.

[tamra]

Hi Lauren,
A 4.5% rate to refinance would help us out tremendously.
We have good credit and have never missed a payment. Things are getting tough. I don't want to get to the point where we are borrowing from Peter to pay Paul. We also have three boys. One of which will be going to college in 3 years.
Again, I am praying that the rates hit 4.5% or even lower.
I think it will be helpful to many to keep them out of forclosure.

[Cal]

"if you can find me a no point 5.5 jumbo I'll buy a house with it tomorrow"

Penfed is quoting 5.75% at par today on a 875k with 175k down (80% LTV) full doc, so if you are really that close in your buy vs don't buy decisions, I think you could buy. A half point would get you down to 5.5%. I wouldn't buy for all the obvious reasons but everyone has to make their own decision.

It is hard to find less expensive jumbos, but it is still possible. The key really isn't rate (though it helps) it is how long you will be in the home and how long you think prices will decline. Unless you plan on being in the home a very long time, pay extremely high rent relative to the home you are wanting to buy or have very optimistic appreciation assumptions (I think break even on price after 15 years will be optimistic) waiting is the clear choice.

[right]

The US taxpayers are giving billion if not trillions to the banks, yet nothing is being done for the tax payer. I am disgusted.