Lower rates benefit richer homeowners most

For decades home buying demand has directly reflected mortgage interest rates, but no more. One question that has baffled policy makers for six year is: Why haven’t housing markets responded to historically low mortgage rates?

In fact, record low rates have had an impact, according to a new analysis by three contributing editors of Home Value Forecast, just not the impact that the Fed anticipated.

“It is very likely that the top tiers of the owner occupied housing market are the ones benefiting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting,” the economists said.

Since the housing crash in 2008, the economists, James R. Follain, Norman Miller, and Michael Sklarz, argue three factors have made lower mortgage rates relatively useless for lower income buyers.

-- Credit scores for many households have been impacted by defaults, loan modifications, foreclosures, job losses and the breadth of the impact has been sufficient to affect millions of households who now must become or are already renters. Even though buying may be cheaper than renting, such households have little choice but to sit on the sidelines for a few more years.

-- Tight underwriting has increased both the time required to secure a mortgage loan and the challenges for those with less secure income streams. Those paid based on self-reported productivity are being affected more severely since the lenders are now requiring more conservative assumptions on future earnings. Appraisals are also being kicked back if they are not conservative in the selection of appraisal comps, and so the risk tolerance pendulum has swung towards extreme conservatism.

-- The investment appeal of housing and presumption that prices can only go up has lost its shine. Many households had stretched in the 2000-2005 run up and some even invested in second homes or investment properties hoping to flip these units at higher prices. Those late to the party got burned.

The economists analyzed the impact of low rates for fixed rate mortgages on sales in two major markets, Chicago and Phoenix,

“Affordability is definitely improved when mortgage rates are lower and yet the beneficiaries of these more attractive mortgage rates are not evenly distributed among households of all incomes and wealth.

It is very likely that the top tiers of the owner occupied housing market are the ones benefiting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting,” they concluded.

“At the same time we expect that investors have supported the lowest price tiers and are now bidding up the remaining REO sales in an attempt to lap up what is left of distress. Prices in the bottom housing price tiers are still dealing with foreclosure inventory hangovers in some markets with slow and clogged foreclosure systems. Markets where distress has been dispatched more expediently seem to be recovering the fastest,” they said.