Saturday, December 6, 2008

Repairing the Bubble

Rather than come up with a coherent, comprehensive, workable solution to the housing bubble some are suggesting just repair the bubble and re-inflate. Maybe just lowering the rates will fix everything. It worked that way in Japan, right?

Most of this article from the Wall Street Journal titled Lower Rates Help Sell Houses, but Market Faces Broader Ills focuses on the benefits of reduces interest rates. However, there are a few reminders that reducing mortgage rates will not the unemployed, the underwaters, or fix some one's bad credit. It also does not explain where this new group of home buyers will suddenly appear from - the potential pool is only so big. Well, lets take a look at the article -

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.


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.


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.


"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."

Solve the problem - No. Re-inflate the bubble - Yes. Why fix the rot when you can just cover it over. That appears to be some of the thinking here.

The people who will probably jump on the interest rate will be people who are refinancing. Do they really think it will spur this huge new group of people to buy houses? In the current economic environment?

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