Mortgage Rates Rise, But Are Still Low

Mortgage rates are higher than they were the previous week, but high is a relative term. Last week the average 30-year fixed rate mortgage was 4.76 percent. This week it’s 4.81 percent, according to Freddie Mac.

For anyone who bought a house in the early 1980s, when mortgage rates approached 20 percent, today’s rates seem like a dream. But no matter how low interest rates dip, it doesn’t seem to spur home buying.

In fact, sales of new and existing homes plunged last month. In the case of existing homes, an astounding 33 percent of buyers passed up the rock bottom interest rates and bought homes with cash.

Basket case

“Housing is a basket case and is not showing any signs of improving,” said economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa.

Naroff says the economy will have to improve before people start buying homes again. But in past housing recoveries, the combination of falling home prices and rock bottom interest rates has spurred demand that powered a rebound. It’s not happening this time.

Mortgage lenders insist they aren’t to blame. They say anyone with good credit, who can scrape together an adequate down payment, can buy a house. They say they would like to make more loans.

Brandon Cornett, of the Home Buying Institute, has another theory. Falling home prices, the very thing that attracted buyers in the past, is scaring off would-be buyers now.

Still waiting for the dust to settle

“Would-be home buyers are seeing a continuation of home-price declines across the country, and they’re sitting on the bench for now,” he writes. “They’re waiting for the dust to settle. Buyers are not convinced the market has hit bottom.”

The Federal Housing Finance Agency reports that for the 12 months ending in January, U.S. prices fell 3.9 percent.  The U.S. index is 16.5 percent below its April 2007 peak and roughly the same as the May 2004 index level. Private analysts suggest the price drop is much greater.

The question is, how much farther will prices drop? With many industry analysts forecasting a double dip housing recession, chances are good there will be further declines. Unless buyers begin returning to the market in greater numbers, another drop is almost certain.