Wednesday, August 11, 2010

Historically Low Interest Rates Aren't Spurring Real Estate Sales

Historically low interest rates aren't doing anything to spur real estate sales. It's not hard to figure out why. High unemployment and continued uncertainty are preventing people from rushing to buy homes. People can't refinance because they're underwater - which also prevents many from selling because of an aversion to take a real estate loss that could be considerable in many markets (20-30% or more in some of the hardest hit areas, and particularly in places like Las Vegas, Florida, Texas, Arizona, and California).

Real estate experts aren't sure what it would take to spur sales. Some think the rates have to fall into the 3% range. Others think 2%.

Neither is going to improve sales until people think that the markets have hit bottom and real estate starts appreciating again because there is support for existing prices. If people think that prices still have a ways to drop, they'll stand by the sidelines while prices drop, or force more price drops on properties until they're sold.

The White House's latest move to provide zero-interest loans to distressed homeowners is another misstep that does nothing to rectify the situation either.

The same people who can't afford to own the homes they're in and are now facing foreclosure will get zero interest loans that they still can't repay? How exactly does that help? The people who receive these zero interest loans are still incapable of repaying their existing obligations, let alone any new obligations. Even if they convert some or all of their existing obligations to the zero-interest loan, they still can't repay (they're unemployed). It means that the foreclosure process gets delayed just a while longer, meaning that the market readjustments take still longer and affordable housing remains that much longer out of reach for those who can actually afford the housing.

It's not even a band aid when you've got massive hemorrhaging in real estate markets around the country.

Yet, it does look like a typical election year gambit to throw money at constituencies in the hopes of enticing voters.

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