First the bad news. According to CNN, despite rising home prices more than 30% of borrowers still owe more money on their mortgages than their homes are worth. That’s more than 16 million homeowners.
The Federal Housing Finance Agency reported on May 23, 2012 that national home prices increased a slight 0.6% during the first quarter of 2012, which represents the first price gain since 2007. Certainly not near enough to help homeowners who have “underwater mortgages.”
The danger is not that the homeowners will lose their homes, as 90% of the underwater borrowers, as they are referred to, continue to make their payments on time. But it hurts the economy as banks are going to make home equity loans on a home with negative equity. These loans are very popular with people as they use the funds to purchase cars, make home repairs and cover many other expenses. This is just one more example of how the economy, despite some good news, is still hindered by lack of growth.
Now for the good news. The rate on a 30-year fixed mortgage fell to 3.78% from 3.79% from the week before. According to CNN the average 30-year fixed rate in 2011 was 4.6%.
The benefits of lower interest rates to consumers are numerous. First and foremost it lowers the owner’s mortgage payment. Second, it allows the buyer to afford a more expensive home than they could afford if the interest rate was 5% for example.
For the economy overall, lower interest rates work as an enticement for consumers to purchase property when they may otherwise rent. One of the prime indicators of the nation’s economic health is home sales. It means people feel good about the economy and their personal financial position. It also means that banks are comfortable loaning money.
This has been one of the prime reasons cited for the continued stalled economy. Banks unwilling or unable to lend money. So far, the reduced interest rates have done little to spark the economy, but it’s hard to say how much they have kept the economy from getting worse. It seems reasonable to say that they have helped, if only a little, to keep the economy from totaling derailing.
This lack of lending from traditional banking sources has led to unprecedented growth for non-traditional lenders and products. Products such as payday loans and pre-paid debit cards have grown exponentially in the last five years. People need credit, that fact does not change, and if the big banks are not lending, then other sources of capital will step in to help.