And Then We Could Buy A Minneapolis Duplex at 4.5 Percent!

I’m beginning to think the economists charged with leading out of this economic abyss are like a bunch of little kids. Every day, they have a new idea; almost as if they’re making it up as they go along.

This morning, nearly every media outlet carried the news of a rumoured Treasury Department plan that would decrease mortgage rates on 30 year fixed loans for home buyers to as low as 4.5 percent.

In the plan, the Treasury would allegedly offer to buy securities that finance the newly issued home loans. These securities would be purchased primarily from Fannie Mae and Freddie Mac, which are the Government Sponsored Entities (GSEs) that buy most mortgages from U.S. lenders.

Of course, the plan would have to be paid for somehow. It is believed one possibility would be to issue bonds to the public at 3 percent interest, which would allow the government to turn a profit by buying securities that pay 4.5 percent.

There is no word as to whether this approach would be extended to refinances or investment properties.

Would this work? Well, last week, when interest rates on 30 year fixed conventional loans briefly dropped to 5.25 percent, the Mortgage Banker’s Association reported the applications for loans (both new and refinances) were up 112.1 percent; the largest jump on record.

Some economists are concerned just the rumour of low, long-term fixed interest rates may cause some prospective home buyers to postpone a purchase. That “wait and see” attitude would further slow an already sluggish economy.

While I believe this is a possibility, I am also well aware of the laws of supply and demand. Anyone think an abundant supply of mortgage money at 4.5 percent would stimulate the housing market? I do. And when demand increases, so too do prices.