Break out the champagne! Of all the depressing economic news, mortgage rates isn’t one of them. Freddie Mac now reports interest rates for 30-year fixed rate mortgages now average just 4.57 percent. Mortgage rates haven’t been this low since the 1950s!
Generally, the interest rates on mortgages move in lockstep with yields of long-term U.S. Treasuries (TLT). And yields have been falling, which is great for borrowers.
But why aren’t low mortgage rates lifting the beaten up housing market?
Lots of Supply and No Demand
During residential real estate’s boom years, it was the prevailing opinion that buying real estate at any time and at any price was the prudent thing to do. “God isn’t making any more land,” home buyers were reminded by their brokers. And for a long time, probably too long, the strategy worked well, until one day it didn’t.
The supply/demand metrics of the housing market today have completely flip-flopped. Yesteryear, it was seller’s market. Today it’s a buyer’s market, except for one thing; qualified buyers are scarce.
The oversupply of homes has created another perverse effect; foreclosures.
From 2005 to 2009, foreclosure sales jumped 2,500 percent with Arizona, Florida, California and Nevada leading the way.
“As lenders have begun repossessing homes at record levels over the first half of 2010, it will be interesting to watch how they will manage the inventory levels of distressed properties on the market in order to prevent more dramatic price deterioration,” states James J. Saccacio, chief executive officer of RealtyTrac.
Buyer’s Remorse
Today, recently baptized homeowners regret buying their homes because they overpaid. Almost one quarter of all single family homes with a mortgage have negative equity, according to Zillow Real Estate Market Reports.
Since the value of people’s homes is less than their mortgages, refinancing at today’s lower mortgage rates is out of the question. Furthermore, most people with the ability to refinance have already done so and those that haven’t are stuck. Presumably, everyone else doesn’t qualify for nice low mortgage rates. Or as Bob Hope said, “A bank is a place that will lend you money if you can prove that you don’t need it.”
A Crazy Little Thing Called Jobs
People that don’t work don’t have income. (Yes, unemployment checks count as income, but they’re temporary and usually not adequate to cover expenses.) And people without income usually don’t make major purchases, like buying a home. So from this perspective, the ailing job market is having a negative impact on the housing market.
Yet, “unemployment is the lowest in eleven months” is the optimistic message conveyed by June’s job report.
Too bad this rosy statement misses a lot of grotesque details. Namely, nationwide unemployment (U-6) really rose to 16.7%. And if we count college graduates unable to obtain work along with self-employed unemployed workers, the jobless rate is easily above 20%.
Low mortgage rates don’t matter if people are unemployed.
Conclusion
So far this year, the performance of mortgage and real estate equities has been outstanding. The iShares FTSE NAREIT Residential Index Fund (REZ), SPDR S&P Homebuilders ETF (XHB) and iShares FTSE NAREIT Mortgage REITs Index Fund (REM) are all outperforming broader stock market benchmarks through July 7th market close.
But what does it mean? Does it prove the resiliency of the housing market? Does it mean low mortgage rates are helping residential real estate? Is the worst over?
In summary, the discrepancy in performance between publicly traded REITs and the depressed housing market shows a Grand Canyon separation between reality and fantasy. Hollywood isn’t the only place with artificial effects. Just look at real estate.
