Lower Mortgage Rates Won’t Stem Foreclosures
Will the Federal Reserve’s rate cut revive the housing market and stem foreclosures?
Don’t count on it.
The Fed’s interest rate cut is largely symbolic. It makes more funds available to depository institutions — old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. The Fed’s move will do little for what ails the U.S. economy: Falling home prices, tighter lending standards, rising foreclosures and the ever-growing number of unsold houses on the market.
Nor will President George W. Bush’s $150 billion economic stimulus plan prevent Americans from losing their dream of homeownership to foreclosure. The Fed’s move will spark an avalanche of refinancing for homeowners with good credit. But that won’t necessarily translate into lower mortgage costs for some 2 million Americans with risky subprime home loans with rates that are scheduled to adjust sharply higher over the next year. Many subprime borrowers have mortgages larger than what the properties are worth, ruling out the possibility of refinancing from an adjustable rate loan into a fixed mortgage rate.
For the economy to rebound, home values have to return to historic norms. Slowly, home prices are beginning to fall back to more reasonable levels. Over the last year, home prices in the U.S. have fallen by about 6 percent on average, according to the Standard & Poor’s/Case-Shiller index of housing prices, which measures the value of homes in 20 cities.
So, expect a rising tide of foreclosures to continue to add inventory to an already over-saturated housing market. A growing inventory of unsold houses, in turn, will pull down home values, dragging more homeowners into foreclosures as prices drop. Spooked buyers, waiting for the housing market to bottom out, will nervously wait on the sidelines — further depressing prices.
For foreclosure investors and homebuyers this year could be a great opportunity to buy at bargain prices.