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Low Interest Rates Buoy Home Real Estate Market in Period of Recession
by Dr. Oneida Cramer

A major force buoying the buyer side of the home real estate market and helping to stabilize home pricing in this recessionary period is the very, very low interest rates on home mortgages.

?You can get a 30-year conforming, which is a mortgage that is less than $300,700 for 5 ? % today,? said Gary Morris of Morris Financial Services. A 15-year, no points, mortgage may have a 5.625% rate. For one client, Morris is working on a 5-year-one arm adjustable rate mortgage with a 30-year amortization, no points at 5? %, and a 2% cap. That rate will jump to 7? % after 5 years, but it is still lower than the 7? % that the homeowner currently pays.

?All this has caused buyers, at all levels, to seek residences,? Morris said. ?It?s easier to buy a house with the lower rates as you calculate what a family can afford because it?s done as a percentage of income. That?s why home pricing has not declined?because the demand by consumers has been there.?

?There are a number of people that are going to smaller and less expensive houses and then getting a second or third house,? said Dave Perry-Miller, agent with Adleta & Poston. ?That is a trend that I could absolutely identify because I think we?re watching people?there?s a whole group of people who are in their 40?s and 50?s having children leave the nest?going to not necessarily a more expensive home or a less expensive house, they?re going to a different kind of house and a lot of that is predicated on having a second or even a third house someplace?kind of getting things set up for retirement?and doing it at a time when interest rates are very low and they feel it?s a good time for doing that.?

?The crucial thing is that the supply of funding for mortgage money has been very strong,? Morris said. ?That?s because people are willing to put up money because they get a higher rate of return. At the same time, because there?s not a big demand on the system in the commercial side, interest rates have remained very, very low.?

Also forcing lending companies to keep their mortgages low is an intense competition for consumer dollars. Most of the time, mortgage rates will look at the demand for other debt instruments, for instance 15 and 20-year treasury bonds, and then price off of those rates.

?When the economy is in recession?we?re recovering from recession?the demand side, which would normally come from corporations, some from government, has not driven up the cost of money, i.e., interest rates,? Morris said. ?And so, what is happening, because the demand for overall credit is low, it keeps interest rates down. The minute the economy starts to perk up and we start to see activity, interest rates go up because that?s the price you pay for the money.

Like interest rates, home prices, too, go up as the economy improves.

?Potentially it would go up; but there is always a lag,? Morris said. ?Unemployment is one of the stranger things because when the economy turns and moves in the right direction, employment lags for about a year.? Even when the economy is improving, people are being laid off and not called back, and manufacturers will normally extend overtime. They go through these kinds of processes before they add to their workforce. But once the economy does get cranking and people begin to pursue homes because they want a home and they have cash, that process then tends to drive periods of economic boom. Consequently, housing prices begin to go up. During down times, usually they (home prices) stabilize.

-by Dr. Oneida Cramer
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