Falling Mortgage Rates: Monumental Downs
Posted by David Schneider | January 22, 2008

In these past months, mortgage rates and prices have drastically gone down making it appear as if it is a risk-free buyer's market. From an outsider, it definitely looks that way, but once you look at all the contributing factors, you'll realize that there is more going on than you think and the buyer is not coming out on top.

Lenders Aren't Being as Generous

Advertising surrounds the general public notifying them of the plummeting mortgage rates. They're encouraging people to take advantage of the rates and purchase a property. However, this is where the public reaches a Catch-22. Mortgage rates and prices are at a record low during these past five months, but banks and lenders are hesitant with providing potential buyers with loans. Lenders have made stricter requirements and most buyers simply do not qualify.

A couple years ago, Countrywide Financial Corp was carelessly giving loans out to almost anyone who applied. Now they are stuck with foreclosures and people who cannot afford their new adjusted mortgages. In response to this $1.2 billion upset, they have taken measures to prevent any further financial damage, which in turn leads to their stricter qualifying requirements. They are rarely lending money to a zero down mortgage and they desire a high FICO score. The Countrywide example has spread to other lenders and banks, giving them precedence to be picky with their money.

Latest Trend in Investment Property Instead of Primary Homes

Another reason for the spiraling mortgage rates are due to the recent trend of buyers purchasing investment properties or second homes, instead of the purchasing of a primary home. Last year showed that 40 percent of homes that were purchased were bought as second homes. The National Association of Realtors recorded this as the highest percentage of non-owner-occupied purchases in history.

Since these homes are not primary residences, these homes are more likely to be sold and put out in the market again. The owners will less likely want to refinance and will decide to sell their property. So now the demand for housing has also gone down.

Having Lower Mortgage Rates Won't Fix the Problems

With the low housing demand, you would think that the lower mortgage rates would entice investors to come back to the market. However, the recent situation shows that even with the declining mortgage rates, the housing market is still suffering. There are about 3.86 million existing homes and 568,000 new homes currently on the market. These numbers reflect our over-abundant supply of homes. And since lower rates aren't doing much for the market, the future may hold higher rates with the same outcome.

The housing market would like buyers to think that the low mortgage rates will be in your favor, but make sure you look at the big picture. Why aren't more people buying? What's causing all these rates to go down? Is my investment a risk?

If you play your cards right and you look into all the scenarios, you could totally take advantage of this desperate market. Like any investment, don't get involved with anything unless you know what your choices and information are.