Mortgage Rates and House Prices

Recently there was an article from Reuters we profiled discussed the relationship between interest rates and the numbers of houses that had the potential to be underwater. Lets take a look at the key quote -

If borrowing costs eased to 5.5 percent, the Case-Shiller index may have only another 7 percent to fall, Credit Suisse said, but if rates rise to 7.5 percent, house prices may tumble another 24 percent. A 24 percent decline would wipe out the entire home equity for millions of homeowners, many of whom were counting on their homes to finance their retirement or pay for their childrens' college education. Without that nest egg, spending would suffer, triggering a consumer-led recession that some economists predict would be the worst since the early 1980s.

Well, today CNN Money is reporting that the interest rates are increasing. The article is titled Housing fix backfires, raising rates for everyone. Lets take a look -

As part of the economic stimulus plan, lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets. That was supposed to bring down mortgage rates on jumbo loans and help goose sales in cities across the country - mostly on the East and West coasts - where even outhouses go for close to half a mil.

So just how much help has this change been for homeowners? Not much. Six months ago, the rate on a $500,000 30-year fixed mortgage was 6.73%. Today the rate today is only slightly lower at 6.69%. No surprise then that the housing market is still stuck in reverse.

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The idea was to narrow the spread between the interest rates for buyers taking out loans of less than $417,000, and those borrowing between $417,000 and roughly $730,000. By February, the rate on a loan over $417,000 was as much as 1.5 percentage points higher than loans beneath that cap, according to mortgage industry research firm HSH Associates.

But rates haven't fallen for those hoping to get a larger mortgage, and they've actually risen for everyone else. The average rate for a mortgage of $417,000 or less is now at 6.57%, while loans larger than that have rates about 0.12 of a percentage point higher. Sure, the spread narrowed, but only because rates are going up for everyone.

Several factors are at work. Since Fannie and Freddie look shakier than ever, fewer investors are willing to buy their bonds - even with the government's guarantee. And the raised caps forced the mortgage giants to spread their limited capital across a much larger market of mortgages.

The rising interest rates are going to suppress the prices of houses even more. A downward push of house values is just going to perpetuate and exacerbate an already shaky housing market.