Interest Rates at 4.5%?

Yesterday, the Treasury Department announced they were tinkering with the idea of reducing interest rates for new purchases to 4.5% while currently interest rates are somewhere in the mid 5% range. This new rate would only be for new purchases not refinances. I have had several people in the last 24 hours ask me what I thought about this, so here are my thoughts:

The more I have thought about this over the past 24 hours, the more I think this is a really BAD idea. I understand the thought process behind it. Lower the rates to give an incentive for people to get out and buy up the excess inventory of homes that are on the market. But, here are the problems with that I see with that thought process.

1. It would cause a short term housing bubble. By artificially flooding the market with buyers, if it actually would work, you would create a temporary demand that would raise prices. After the rates went back up, the bubble would burst and we would be back in the same position we are in now---but only worse!

2. What happens when these buyers, who have bought at 4.5%, go to resell in a few years. The new buy rate will not be that low and they will end up paying for it on the next purchase.

3. The problem in the housing market could be more easily resolved by the re-implementation of gift programs through FHA. A few months ago, our government took away the ability for sellers to do down payment assistance programs for buyers. Starting early 2009 buyers will be required to have a minimum down payment of 3.5%. There would be a large number of qualified buyers with good credit history that cannot afford the 3.5% down payment. By taking that rule off of the books, you could create an influx of legitimate buyers. This last housing bubble was caused by giving loans to people with poor credit with nothing down. Not by giving no down loans to people with good credit.

4. It might have the opposite effect. It is possible that by lowering the interest rate to 4.5% it could create even more inventory in a market that already has too much. Because this rate would be good on only purchases, you could have people trying to sell there home in order to buy and take advantage of the 4.5% rate. This would actually take housing prices even lower than what they currently are.

Well, that is what I think about that idea. I would be glad to hear your thoughts. And, just a FYI, these thoughts go 100% against what the National Association of Realtors thinks we should do. They are in favor of, and pushing for this 4.5% interest rate. To make your opinion heard, call your local congressman. Mine is Joe Donnelly and his number is 574-288-2780.