A possible move by the Treasury Department to push down mortgage rates has raised the hopes of home buyers, real-estate agents and economists -- and the share prices of residential builders and related businesses.But the proposal, if implemented as reported, won't be a cure-all for the myriad problems that have curtailed buying.
The Treasury is considering a plan that could enable banks to lend at rates as low as 4.5%, which is more than a full point lower than the prevailing rates on standard 30-year mortgages.
"People are going to see what this does to their mortgage payment, and they will be kicking themselves if they don't jump in and buy," said David Romero, chief operating officer of Century 21 Award in San Diego.
Lower rates alone, however, can't overcome the job losses, lack of down payments and poor credit that have all but frozen the market. And then there are the big-picture factors keeping some would-be buyers on the fence, including worries about the economy and a rocky stock market that is eroding retirement savings.
Some economists also argue that the plan wouldn't help borrowers most in need, including those who owe more than their homes are worth, and therefore might not reduce foreclosures.
"Nine of the top 10 issues hurting sales have to do with poor consumer confidence," said Larry Sorsby, chief financial officer of builder Hovnanian Enterprises Inc in Red Bank, N.J. "You are being bombarded by bad economic news, and people are in fear of keeping their jobs."
Rates on 30-year mortgages plunged this week to the lowest level since January, after the government launched a sweeping effort to aid the housing market. Mortgage-finance giant Freddie Mac reported Thursday that average rates on 30-year fixed mortgages dropped to 5.53% from 5.97% last week -- the largest one-week drop in 27 years.
Home builders, which saw the Dow Jones Wilshire Home Construction Index jump 5.94% Thursday on news that the Treasury was considering the mortgage plan, are still hoping the government does more to spur demand. Their wish list includes a $22,000 tax credit for home buyers and a mortgage-rate buydown that would trim rates to as low as 2.99%.
"A 4.5% rate is a positive step, but it's not enough to do the job," Mr. Sorsby said.
Reducing rates by about one percentage point would effectively lower home prices for buyers by roughly 10%, said Lawrence Yun, chief economist for the National Association of Realtors, which has championed the proposal being considered by the Treasury. The group says each percentage-point reduction in interest could sell between 500,000 and 800,000 homes.
According to investment bank Credit Suisse, 16% of all mortgages, or 8.1 million in all, will be in foreclosure over the next four years. In April, the firm forecast there would be 6.5 million.
The proposed initiative might allow someone considering a $200,000 mortgage to take out a $225,000 loan without paying more interest.
Besides lowering monthly payments, a 4.5% rate would allow buyers to qualify for larger mortgages with less income. With rates around 5.5%, a buyer typically needs income of $92,000, assuming a 10% down payment, to qualify for a $400,000 30-year fixed-rate mortgage. When rates drop to 4.5%, income of $84,000 is needed to qualify, said David Stevens, president of real-estate firm Long & Foster Cos. in Chantilly, Va.
Lower rates would be especially beneficial for buyers of higher-priced homes. In recent months, first-time buyers and bargain-hunting investors have been snapping up lower-priced homes, but pricier ones in the Raleigh Real Estate, Wilson Real Estate, High Point Real Estate, Gated Community Hillsborough NC and Estate Homes Raleigh markets have had great sales.
The lower rates "could free up the move-up and middle-priced markets," Mr. Stevens said. "And that could raise the average sales prices in many markets."
Word that the government may try to push down mortgage rates comes as house prices have fallen 22% nationally since their peak, and likely dropped further as the financial crisis intensified the past two months. Lowering rates could help establish a floor under home values.
In parts of California's Inland Empire, a hard-hit housing market east of Los Angeles, falling rates have been enticing buyers in recent days, said local real-estate agent Graham Holmes. Since the Federal Reserve announced plans on Nov. 25 to buy $600 billion of mortgage debt, Mr. Holmes has had three houses enter into contracts, compared with one the previous week.
"Some buyers were on the borderline in qualifying for the payments, and these lower rates have brought them in line," he said.
But broader forces are countering efforts to expand the buyer pool. Job losses are mounting most among 25-to-34-year-olds, a critical segment of first-time buyers. Foreclosures and credit-card defaults are hurting others' credit scores. Meanwhile, banks have tightened standards, making it tougher for buyers to qualify. Lately there are also lower rates on Cheap Mexico Cruises and Cheap Europe Cruises.
"You need good credit to take advantage of low interest rates," said Craig Beggins, president of Century 21, Beggins Enterprises, in Tampa Bay, Fla. "And there's not enough people with good credit left."
