Mortgage ABC

This Time, Falling Rates May Not Help

Don't read too much into the falling rates in the last few weeks. They may not rekindle the cooling market.

Allen Hardester, a senior executive with a Maryland-based lender, Hyland Financial Services, says most of the demand for homes is in the affordable price range - $200,000 to $300,000 - and that's where lower interest rates will help. Many buyers are stretching the limits of their budgets. Lower interest will make those limits a bit more elastic.

But in Hardester's opinion, even if rates do drop further, it may not be enough to offset another factor that was a feature of the boom - the decline speculative investing. NAR reported that 40 percent of all home sales in 2005 were purchased primarily for investment (28 percent) or for second homes (12 percent).

Many of those speculators have stopped buying. Some have even put their properties on sale, helping to fuel the inventory glut (see table). There were 3.9 million homes on the market in August, up 38 percent from a year earlier.That will work against sellers trying to keep prices from falling further.

In addition, interest on adjustable rate mortgages, which added lots of fuel to some of the nation's hottest housing regions, have not returned to the very low levels they hit in 2003, when a one-year ARM could be had for 3.40 percent, or less. That's more than 2 percentage points below where they are now.

Neil Garfinkel, a real estate and banking law attorney with Abrams Garfinkel Margolis Bergson, LLP, says the current mortgage rates are merely keeping a tough real estate market from getting worse. "I think that if anything has saved the market, it's the low interest rates. Consumers have been gun shy. They hear about bubbles and what disaster is going to happen. If interest rates had shot through the roof it would have been a big problem."