Last week mortgage inquiries shot up due to the rate reductions made by a new Federal Reserve program last week. The boost was a nice shot in the arm for mortgage companies who were able to capitalize on the increased traffic, but what is the effect on the hurting homeowner? Does a rate reduction directly help home owners upside down or that have less then 20% equity in their homes?
Initially I don’t think it does. For those homeowners that have lost little to no value in their homes a rate reduction is going to be very helpful, but in my opinion, for the rest of the country it is not going to be all that helpful. Here are my thoughts on the issue.
There are other strong factors aside from adjusting rates and increasing monthly payments that are affecting current homeowners and that’s the tightening of loan guidelines. The one solution for these people are loan modifications, which is be pushed by more and more banks everyday. With that said though, a sustained rate may only help homeowners in critical situations by spurring new home purchases.
Currently there are thousands of real estate investors that have been sitting on the sidelines waiting for their opportunity to reinvest back into real estate. In California, many have moved their investments to other states or into cash positions knowing that the day will come when values would drop dramatically and phenomenal opportunities would present themselves like the did in the mid 80’s. Currently we are starting to see small bidding wars on REO properties. Of course this has no effect on the non bank owned listings, but proves that investors are starting to become more active.
With a sustained rate reduction we should see more home purchases. Homeowners unable to qualify for a loan and that are forced to sell their house could possibly begin to see more interest a short time span on the market. I don’t think this will be noticeable in the next 3-4 months, but if rates stay low well into the summer of 2009 investors will begin to jump back into the market, see significant discounts on homes and also low interest rates and that will energize the RE investment circles. Once that does happen I believe that it will prove the bottoming out of the real estate market and the stabilization of the real estate values.
A few big caveats are the unemployment rate and the disintegration of credit scores. This may prove more reasons for investors to find excellent real estate opportunities. It is my thought that infusion of real estate investors will be the key indicator that bottom has been met. We here in CA are starting to see small signs of that now.
What are your thoughts?
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