Recent Insightful Comment Posted 6/12/2009 Regarding Current Mortgage Rates:

"Your logic was excellent and included most of the relevant supply/demand factors that have changed since 1997.

One factor you might have missed (which could be relevant) is mortgage rates are lower today than they were in 1997 which normally would be a huge demand factor supporting higher prices.

I personally think excess housing supply growing dramatically (I think this economy will be so bad the number of households contracts as the average number of people living in a residence grows) will outweigh the lower mortgage rates and your argument may prove accurate but mortgage rates are still important.

If mortgage rates increase you may look like even more of a prophet."


Response on the Centrality of Affordable Mortgages to the Housing Bubble Distortion and the Reality of Current Mortgage Rates

My friend,

You raise one of the FUNDAMENTAL issues of the Housing Bubble and the ongoing collapse in prices.

The media, politicians and real estate brokers preach that mortgage interest rates are lower today than during the Housing Bubble. 

This is ABSOLUTELY FALSE and is central to an understanding as to why this is The Affordable Mortgage Depression.

Prices are determined at the margin.  At the margin during the Housing Bubble Affordable Mortgages were available.  No-down payment, Interest Only, ARMs and Option-ARMs drove ever rising house prices. 

Access to Credit, Cash Flow and Capital were/are prerequisites for owning a home and act to restrain home prices.  Affordable Mortgages removed these requirments, and the buyers utilizing them became insensitize to price.

The functional cost of owning a house after purchase is your monthly mortgage payment.  An interest-only loan, for instance, removed the cash flow requirement that capital be repaid thus lowering the cost of ownership.  Try getting such a loan today.

But the real culprits were ARMs and Option-ARMs.  People made the decision as to what they could afford to pay for a house based on the monthly service requirement at the adjustable-rate.  These rates fell to as low as 1%.  At a 2% introductory rate one's annual mortgage payment on a $500,000 mortgage is $10,000.  Anyone who could afford rent in America, could afford to overpay for an already overvalued house.  Today, at the lowest 30-year rates in history (5%) that same mortgage would be two-and-a-half times as expensive and cost $25,000 a year. 

It seems insane now, but all parties believed that the home could be refinanced or sold for a profit prior to the interest rates resetting.  Today those interest rates are resetting.  And they will continue to reset through 2012.

At present the 30-year fixed interest rate is at near-record lows because the Government is subsidizing it.  AND IT DOES NOT MATTER.  Marginal interest rates today are MUCH higher due to the eradication of adjustable rate loans.

Please see the article “Mortgage Rates Do Not Matter” or the much more comprehensive "Why this Economic Downturn is The Affordable Mortgage Depression" for a better explanation.