So the Fed has lowered interest rates to rock bottom, at 3.75%. The government has been a bank for several months, making 90% of mortgage loans to anyone with a pulse, following the same doomed playbook the sub-prime lenders followed. The results of this strategy, however, will be quite different.
In a free market, when someone makes a bad loan, they go out of business and only the business owners are hurt. In a government market, when the government makes a bad loan, they raise your taxes to pay for it, and we all get hurt.
So with rock-bottom interest rates and the government giving housing loans to anyone, how has the housing market responded? As economists would expect, and have been predicting for years, it hasn’t responded at all…well…at least not the way the government wanted it to.
What has happened, is comotose sales volumes through the summer selling season, an increase in default notices and shadow inventory, continued declines in home prices and now…a slowly increasing interest rate.
What happens when interest rates rise on home loans? It puts pressure on home prices to come down.
From The Wall Street Examiner on Mish’s Blog, please consider the following:
Purchase mortgage applications dropped to near record lows last week as government programs to suppress mortgage rates first failed to stimulate demand, and now seem to be failing to suppress rates. Zillow sales volume data now confirms that this September was by far the worst September since the housing collapse began. Since then, purchase mortgage applications have remained near record lows.
That means that housing sales data to be reported over the next two months will continue to be terrible. Data from Housingtracker.net as of mid November shows that price declines are actually accelerating. Meanwhile shadow inventory will continue to feed into the supply with the inventory to sales ratio already near record levels. Supply demand imbalances will grow increasingly unfavorable.