On Tuesday, the Federal Reserve cut the federal-funding rate to between 0% and 0.25% allowing banks to borrow for relatively nothing. As a result, mortgages are now available at 5.25%. The same day, Pres Bush stated that the Gov’t is looking at a bond-buying program which will allow Fannie and Freddie to offer fixed-rate loans at 4.5%.
Does anyone else see a problem with this???
Bill Seidman, former chairman of the FDIC, participated in a panel last Thursday which discussed the mortgage crisis. He made several points I’d like to echo:
- Since the 1950’s home ownership has been roughly 60%. Since 2005 it has grown to over 70%. This level cannot be sustained.
- Home prices have increased too fast relative to incomes.
- Cutting interest rates has artificially propped up home prices that are unsustainable.
All of this means one thing to me – I have perfect credit, a down payment, am flexible with location, but I can’t buy a house! Here is why:
1) If I buy now, I will be overpaying. Houses are not worth as much as people are trying to sell them for.
2) I might get a REALLY good interest rate, but eventually I will need to sell my house. If interest rates have returned to “normal” levels, my house will be less affordable. For example, if I buy a $200K house at 4.5%, my payment is $1,000 a month. If rates then go to 7.5%, the buyer would need to be able to afford a 40% higher payment.
3) There have been close to 3 million foreclosures from the 3-yr ARMS resetting. It is expected there will be an additional 3.5 million foreclosures from all the 5-yr ARMS. This will further depress resale values.
4) Property taxes in my area are 2.8%. In my example, this is approx $465 a month. As local gov’ts are running deficits, I expect this to go up too.
So let the rates go up, let banks and homeowners take some losses, and let the home prices return to normal levels… cause my apartment is getting crowded!
Last 3 posts by Eric B.
- Nassim Taleb on the Economy - June 25th, 2010
- Full Circle - May 3rd, 2010
- The Dark Side :) - April 5th, 2010
I don’t know man. I like the 4.875% loan I saw advertised on Wells Fargo. This brings home prices into a range where i can make the payment. I wish they did this about 6 months from now since I have a lease until September. I think the drop in rates will have negative concequences, but it might be the jolt we need to get us out of the down spiral. Plus I like lower interest rates instead of lower principal adjustments. Although under Obama that is likely to happen as well. That drives me crazy.
I 100% agree with Eric. All we’re doing is prolonging artificially high home prices. Sure, homes are more affordable now than they were 2 years ago, but they’re still too high. If the government left interest rates up to the market to decide, we would see higher rates right now and more foreclosures. Home prices would come down even more. The semi-affordable home right now would be very affordable in the near future. This all makes me sick to my stomach.
One way that you can save someone some money is by doing an FHA loan. Those are transferable so you could use that as a selling point to a potential buyer by offering a rate 2 points lower than the average.
I’m really confused, because what you say makes so much sense but the Fed doesn’t seem to understand it. You’re not preaching rocket science here. Ben Bernanke is supposed to be an intelligent guy, has he not been able to figure this out? Or is he simply giving into political pressure to keep people in their foolish mortgages?
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