September 26, 2008

What Effect Does Low Interest Rates Have on the Foreclosure and US Housing Market?

Filed under: Uncategorized — americanforeclosures @ 1:20 pm

Here’s a good syndicated Ezine article about the effeect of low interest rates on the US economy, also when and how it will affect the foreclosure/housing market.

Before this week’s latest interest rate cut and rumors of a further government mortgage bailout, housing and real estate prices had been projected to continue falling for the next year or more. It will probably be a few more weeks before mortgage interest rates are affected (if they are affected at all), but one widely expected consequence of cheaper fed rates is that mortgages and other loans will become more affordable. If mortgage rates do decline, speculative buyers will see a clear opportunity to purchase real estate at deep discounts from last year’s high prices. Homeowners with variable rate mortgages such as ARMS may also use this opportunity to refinance into low fixed-rate mortgages.

As if to further encourage speculation, President Bush and members of Congress have spoken out repeatedly in support of government subsidies to bailout distressed mortgage brokers and home-owners. If such legislation passes with significant financial backing, investors will be encouraged by the implied security of future real estate purchases and the bill will keep the loan companies profitable and selling new loans. With risk removed by a government bailout, investors and landlords will be again encouraged to buy houses quickly while they are still under the bubble-market highs. If such demand spikes occur due to federal backing of the market, prices could rise fairly quickly between three months and nine months from now.

The primary risk involved with the interest rate cut is that investor demand for the U.S. Dollar will decrease and its value will continue to fall, perhaps at an accelerated rate. Stocks, commodities, and precious metals will continue to rise, as will the cost of living. The hopes of the Fed and Congress is that real estate prices and job creation will also rise. However, if house sales remain slow and if inflation causes business costs to rise faster than job creation, there is a serious risk of recession before the 2009 presidential inauguration.

In all, low interest rates may help home prices but it may not help consumers struggling to cope with higher general prices and expensive mortgages. Gas prices will most likely continue climbing as the dollar tests new lows against the Euro, and bio-fuel production is having a major effect on agricultural prices.

This article is written by John McDonald. More articles regarding real estate and market analysis can be found at his website.

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