The Solution to the Housing Crisis - Raise Mortgage Interest Rates

Blasphemy, you say.  On the contrary, it could be the only way. 

Mortgage interest rates may be the lowest they have been — EVER — and we are being told there is a possibility that they may continue to decline, or at least stay the same for awhile.  A 30-year fixed is hovering around 4 percent; a 15-year fixed is at about 3.5 percent; and a 5-year adjustable is under 3 percent, couple that with the today’s home prices, the cost of owning a home has created the perfect storm for any buyer.  And yet, with the exception of few communities (Madison being one of them), and savvy investors who are buying with cash, homes are not selling. 

So the question is, why?  Yes, the economy is struggling, and yes, the banks have made it more difficult to obtain a mortgage, and yes, jobs, jobs, jobs, and yes, the press is clearly showing doom and gloom, however, I also believe that a reason why homes are not selling is that buyers have no urgency to buy today.  They continue to hear from the Feds that rates may go down even further with home prices.  Why buy now, just wait it out.  It is even more so indicated by the fact that the rental market has exploded because everyone needs to live somewhere.  (We all remember that one of Maslow’s “Hierarchy of Needs” is shelter.)

An example of urgency in recent years was the First Time Homebuyer Credit Incentive in which there was a frenzy to close by a certain date in order to receive it.  The result was a giant surge for a couple months.  I am not advocating the same to happen again.  It will cost the American tax payer too much to assist a small segment, although it did help more than the first-timer, it got move-up buyers to sell their homes to buy another, as the trickle-up affect took effect.      

Raising mortgage interest rates (or at least implying it), will create a similar response, however, as opposed to the first time buyers credit, it will help all buyers and of course, sellers. Once the rates begin to climb you will see buyers come out of the woodwork to purchase a home as to avoid those higher rates.  The urgency is therefore created and once homes begin to sell, the economy becomes rejuvenated, producing more jobs, and maybe home prices will stop its slide down this very slippery slope.    

Of course, other factors have to coincide with the increase such as slightly relaxing the qualifications for obtaining those mortgages.  Or another suggestion is that financial institutions create a sliding scale of qualifications based on the risk factor of each applicant.  Call it Personal Mortgage Rate Pricing (PMRP), in which establishing a mortgage rate is based on the mortgagor’s credit score, amount of down-payment, employment and income factors, etc., similar to how insurance companies use actuarial tables to determine premiums. 

I think it was President Clinton who said it best (please correct me if I am wrong), “It’s the economy, stupid.” Raising mortgage interest rates may be against everything that economists are telling us but it is obvious what they are recommending and what is being implemented are not working.

What’s your opinion?  Reply below or email me at jeff@mycoccia.com