Lower mortgage rates help but jobs, prices key

By Lynn Adler - Analysis

NEW YORK (Reuters) - The lowest mortgage rates in three years are luring first-time buyers and cost-cutting refinancers, but falling home prices and mounting unemployment will keep U.S. housing in its deepest slump since the Great Depression.

Applications to buy and refinance homes hurtled higher last week as the lowest rates since the summer of 2005 unleashed pent-up demand. But the rush of activity does not portend a sustained boon to housing and the economy, analysts said.

"The lower interest rate will help, but that's not the whole story," said Doug Duncan, chief economist at Fannie Mae (FNM.P)(FNM.N). "Unemployment is going up and consumers have pulled way back and are trying to build savings, so they're not going to be aggressively in the housing market."

A government plan to sop up hundreds of billions of mortgage securities spurred a bond rally that yanked 30-year home loan rates down half a percentage point to about 5.5 percent in the Thanksgiving week.

The 38 percent leap in applications to buy homes and 203 percent spike in refinancing loan demand came from the lowest levels in eight years, however, based on data from the Mortgage Bankers Association.

Borrowers whose refi applications are granted by lenders will pare payments or switch out of riskier adjustable-rate loans. Lenders have tightened standards amid record foreclosures.

The purchase side is murkier, analysts and lenders said.

The supply of unsold homes is near record highs. Buyers fearing job loss, or betting on even greater bargains, are unlikely to commit now to one of their biggest investments.

DIRE OUTLOOK FOR JOBS AND HOME PRICES

U.S. private employers cut 250,000 jobs in November, ADP Employer Services said on Wednesday. That was the most in seven years and the latest sign of recession's fallout.

The U.S. unemployment rate, due out on Friday, likely rose to 6.8 percent in November after setting a 14-year high of 6.5 percent the prior month, according to a Reuters poll.

"House price declines and interest-rate declines make housing more affordable. But the bottom line problem is not that people need to refinance, we need to sell some houses and reduce inventory," Duncan said.

And that may be slow going if house prices fall into 2010, as Duncan forecasts. New home building, "where you add to GDP," won't bottom until the second quarter of next year, he said.

The Standard & Poor's/Case-Shiller 20-city price index has already tumbled nearly 22 percent from its summer 2006 peak.

Where buying is seeing the greatest pickup is often in distressed sales, which the National Association of Realtors said accounted for almost half of October's existing home transactions.