Home buyers save more with low interest rates

Acquiring a mortgage loan


Bill Radke: So low interest rates are a drag if you're a saver. But if you're a home buyer, well then, you're ecstatic. Today, mortgage rates fell to the lowest level on record. Again. 4.36 percent for a 30-year fixed. Now, home owners have reacted -- refinances are booming.

But home sales? Have barely budged. Think about that: Many economists have said home buying stalled because that $8,000 federal tax credit
for first-time home buyers ran out in April, we lost this big buying incentive. But these low interest rates? Those would save you way more money than an $8,000 tax credit. So why aren't the rock-bottom rates lighting a home-buying fire?

We asked Marketplace's Nancy Marshall Genzer to solve the riddle.

Nancy Marshall Genzer: Take today's low mortgages rates and compare them to where rates were in April. If you bought now, you could eventually save about $27,000 -- more than three times the value of the tax credit. But home buyers apparently haven't been swayed by that math.

And Greg McBride of Bankrate.com says that's because buyers are impatient. The tax credit was immediate. The long-term savings is not.

Greg McBride: If I say to you, "Nancy, I'll give you 100 bucks now, or I'll give you 10 bucks a month for the next 10 months," which one would you rather have?

I'd take 100 bucks now, of course. The other reason low mortgage rates aren't as appealing as the tax credit? You've have to stay in the same house for 30 years to get the full savings. Most people only own a home for seven years. But there's another reason people aren't tempted by the low mortgage rates. They're spooked by the high unemployment rate.

Anthony Sanders teaches real estate finance at George Mason University.

Anthony Sanders: It's just not the size of the mortgage payment. It's whether you're going to keep your job. That is the big, 800-pound gorilla in the room.

With that big hairy gorilla hanging around, no one's going bananas over low mortgage rates. But even if you are tempted, it's not easy to get a loan now.

Chris Mayer teaches real estate at Columbia Business School.

Chris Mayer: Anybody who's been unemployed probably got behind in some bill at some point in that process, and their credit score got hit and that is going to make it a lot harder for them to get a mortgage.

Plus, banks are demanding higher down payments, also a tall order in a tough economy.

In Washington, I'm Nancy Marshall Genzer for Marketplace.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.
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It is a great time to buy...at the right price.

I would like to point out that many more people could refinance if housing prices would go up. We are upside down in our house and can't refinance out of our 8% loan. Where is the fed in this? I think they should help people in my situation by offering some extremely-low interest loan to cover the upside-down difference so we could refinance, lower our monthly payment, and invest in the economy (spend money).

As one of those people who could buy a house right now but aren't doing so, I'd offer a simple reason for our behavior that was left out of the report: Yes, mortgage rates are very low, but many of us believe that home prices haven't fallen as far from their bubble levels as they should. Let home prices fall to what buyers believe is a sensible level, and you'll see more movement in the market.

(And after all, isn't that just basic economics? If something isn't selling to the extent that supply keeps growing while demand falls, that's a classic symptom of an overpriced item, isn't it?)

Why would anyone (except a Realtor, who ALWAYS think it's the best time to buy) think that falling interest rates are good for home buyers? 1. A falling rate today means that tomorrow may be better. 2. A historically low rate today means that the buyer will never be able to refinance to a lower rate. 3. The amount that a buyer can spend is independent of the interest rate: you can only spend what you can spend, whether it's low-interest@high-price, or high-interest@low-price. So, if a buyer can wait, rates may go back up, they'll get a better price, and the possibility of a refi in a few years.
Lately, we've heard that "home prices have increased" (in the Washington DC Metro area). There are three "stories" that could satisfy this statistic. 1> sales are shifting toward more expensive properties, as higher-income homeowners get desperate or foreclose. So, a bigger house sold at a bigger discount still looks like a bigger sale. 2> Buyers are looking for smaller houses, abandoning the mcMansion lifestyle, so the increased demand drives up the cost of small houses, while big houses don't sell, so the sales figure goes up. 3> "A rising tide lifts all boats." Somehow, I don't think that's it!

In her analysis today of why the housing market isn't picking up, I believe Nancy Marshall-Genzer missed an important point.

For those who have decent credit and are in the market to buy a foreclosure or bank-owned property, one big problem stands in their way. Before a lender will close on a sale, they often require the selling bank to make major improvements to make the house move-in ready before it will pass the inspection.

My daughter's friend is trying to buy such a property. In order to get final approval, he had to make repairs that the selling bank wasn't willing to do. He got access to the house and patched holes in the walls, replaced a missing oven, and installed carpets, along with other clean-up and minor repairs.

Although this method was probably illegal and he has no recourse to recoup his expenses if his lender isn't satisfied, this was his only way to try to make this sale happen.

So if you really want to know what's going on out there, try to buy one of these houses. Then add that experience to the "theoretical" economic reasons to get the total picture.

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