How Low Can Interest Rates Go?

Builders and Realtors are applauding the news that Treasury officials are considering a proposal to lower interest rates for new home purchases. But some financial analysts and brokers are less sanguine about the proposal.

For one, they say that news that interest rates could fall lower has iced potential sales, which already received a big boost last week when the Federal Reserve said it would buy up $500 billion in mortgage-backed securities. Refinancing applications tripled on the news, the Mortgage Bankers Association said.

Lawrence Yun, chief economist for the National Association of Realtors, says that reports of subsidized mortgage rates could lure many more potential buyers than the handful of serious buyers who may decide to hold out for lower rates. But he concedes that, in the short term, the news that interest rates may continue to fall “could hold back some consumers” who were serious about buying immediately.

A spokesman for Bank of America says that customers should make decisions based on where mortgage rates currently stand, not on where they might go. “It is as difficult to time rates in the mortgage market as it is to time the stock market. If a borrower determines the current rate makes sense and provides them with an advantage in their situation, that’s a good time to consider taking action,” says Rick Simon, a Bank of America spokesman.

Others worry about the unintended consequences and bottlenecks that could stem from a new surge in lending. “When you combine the Fed plan with the prospects of this new Treasury plan, that’s a lot in a very short period of time,” says Greg McBride, senior financial analyst at Bankrate.com. “Anytime you get that much action in a short period of time, you have to worry… are we inflating the next bubble?”

Builders are pushing their own proposal to lower rates to 3% next year, but some say that 4.5% is too generous. Interest rates, at 5.5%, are near a nearly 50-year low of 5.375% set in June 2003.

Builders say the proposal could help stop a slide in home prices, clear existing inventory and create more jobs.

Lowering interest rates, currently to 4.5% would substantially increase consumers’ buying power. Someone looking at a $200,000 mortgage would be able to consider a $230,000 loan without paying more in interest rates. But any stimulus faces several challenges, including tightening credit, buyers who may not have much savings for a down payment, and weak consumer confidence. Courtesy Wall St. Journal