NEW YORK, Sept 9 (Reuters) - The fall in home mortgage rates this week, after the U.S. government took over giant lenders Fannie Mae and Freddie Mac, has stoked home buyer interest, but the massive inventory of unsold homes on the market and fears of job losses may keep house prices falling.
The government took over Fannie Mae FNM.N and Freddie Mac FRE.N on Sunday aiming to stabilize the two-year fall in house prices, the worst since the Great Depression, and ease the credit crunch in global markets.
In just one day though on Monday, average 30-year mortgage rates fell by half a percentage point to about 6.0 percent. In some areas home shopping has already picked up but it will take a few weeks to get a good read on buyer traffic, real estate executives say.
“It’s enough to turn the starter, but I don’t know that it keeps the engine running,” said A.W. Pickel, chief executive of LeaderOne Financial Corporation in Overland Park, Kansas.
Another half a percentage point drop is widely expected. That would bring home mortgage interest rates back to levels seen last in January.
The industry rule of thumb is that sales rise 10 percent for every one percent drop in mortgage rates, although the research behind the relationship was not conducted in current market conditions, said Tim Eller, chief executive of Centex Corp. (CTX.N), the No. 3 U.S. home builder.
And those conditions are daunting. There’s near record inventory of unsold homes. Home prices have fallen by about 15 percent nationally during the past two years and could slide at least into mid-2009, economists note.
The cost savings of a half percentage point or full percentage point on a mortgage rate may not assuage fears of buying a depreciating asset, or of possibly losing a job. The U.S. jobless rate jumped to a five-year high in August.
“People need to feel comfortable about their current job situation to say ‘I’m going to move up, or I’m going to buy and move forward,” Pickel adds. It would help if gas prices were nearer to $2 rather than the recent $4 a gallon, he adds.
Monthly payments on a $300,000 30-year mortgage would drop by just around $100 to $1,798 if the loan rate fell half a point to 6.0 percent, according to Pickel. “For most people making a decision to buy a house, $100 is not going to make the difference,” although the half-point rate cut is a motivator.
The Fannie Mae and Freddie Mac bailout could go a long way toward restoring confidence in a market stymied by rigid lending criteria fostered by record foreclosures.
The two companies buy mortgages from lenders, freeing up money for more loans. Now that the U.S. Treasury has committed to buying mortgage bonds backed by those loans from Fannie and Freddie, lending could pick up, analysts say.
Still, is a half point or point rate cut going to lure wary buyers if home prices are still falling?
The question is “how to grab that falling knife and not get killed,” says Phil Immel, broker associate with Prudential California Realty-Orange County, California, a Warren Buffet-Berkshire Hathaway Company.
It’s not an optimal market for everyone, he says. But if you rent now, or plan to own for at least five years, there are plenty of properties to choose and some are at distressed prices.
“I think half a point gets the people out looking. One point makes them commit,” says Immel, also founder of RealEstateGuru.com.
This weekend will be the first time realtors have open houses after the mortgage rate cut.
John Murray of Realty Executives Prestige Properties in Boston says the very young, and first-time buyers are usually the most sensitive to rate changes.
“If we saw a big jump in condo sales or agreements or we saw a significant jump in open house attendance at condo properties that would be a good indication that the lower interest rates have made a difference,” he adds. “I probably won’t be able to really tell for 2 to 3 weeks, and it would probably show up first in condo activity.”
In the Boston area, investment properties are moving, Murray adds. “Multifamilies, people purchasing to rent out to make a profit. Not the flipping the way we saw a couple of years ago, but long term buy and hold is probably the most active.”
Jim Gillespie, chief executive of Coldwell Banker Real Estate in Parsippany, New Jersey, points to demographics for the eventual house price gains.
“Prices are not going to go up until inventory levels have been burned off, and we’re not out of the woods yet,” he says. But there’s pent up demand, with four million marriages and eight million babies born over the past two years, he adds.
additional reporting by Helen Chernikoff