Low Interest Generating Low Interest?

Mortgage interest rates came close to hitting a record low last week. All the junk going on in Europe with Greece and Hungary’s financial situations has made US mortgage backed securities more attractive apparently, and the result is some incredibly low mortgage interest rates.
  But not as many buyers are taking advantage of them. There are a couple of factors.

1. The tax credit programs that expired at the end of April ‘borrowed’ some buyers from the summer market, as people made decisions based on the deadline. They aren’t in as much of a hurry now, although this should be a temporary factor, being less of an issue as the mid summer months arrive. Most people do not move based on tax credit type incentives, and that is especially true in relocation, where a lot of my work is.
2. The pool of eligible buyers has shrunk because of the soft job market. People are more income constrained, and cautious, when unemployment is high. Here in Colorado Springs unemployment is 8.2%, not horrible, but not great.
3. The pool of eligible buyers has shrunk because of tightening lending rules. Interest rates can be 2%, but if the rules preclude someone from getting a mortgage, what can they do? Example: John and Mary Smith want to move up to a bigger house, but they currently own a home. In past years, they could rent the existing home and still make the move (if they have enough for the down payment), with the lender counting 75% of the rental income as an offset against the current house payment. The new rules require the existing home to have at least a 1 year rental history in order to count the rental income at all, eliminating the ability to move without selling for many homeowners (who are often underwater on the mortgage). This is just one example, there are LOTS of rules that have tightened, thereby shrinking the buyer pool.
4. Home ownership and the prospect of appreciation has lost some of its shine. Buyers are no longer as confident in the house going up in value as they have for the last 60 years. There are MANY reasons to own your home besides appreciation, but appreciation has certainly become less of an automatic. Of course when the stock market recently dropped 1,000 points in 1/2 hour, it does raise the question, what IS automatic? 🙂
5. At least in Colorado Springs, the supply of homes for sale is increasing very rapidly. We are up to 5,700 unsold homes from 4700 in March, giving buyers the perception that there is no hurry, there will be more for sale tomorrow, and they might even like them better.
6. There is a little bit of ‘chicken and egg’ going on, in that lower demand for mortgages actually brings rates down. Fewer borrowers will have at least some impact on rates, pressuring them downward further.

Conventional wisdom had interest rates heading up by this time. But life happens, and it will be interesting to see how the whole picture unfolds!