Low Mortgage Rates in 2012 Won’t Matter Much

Summary: MBA economists have predicted a continuation of low mortgage rates in 2012. But it probably won’t do much to spur the housing market. Low rates will only benefit a select group of home buyers and homeowners.

Many in the media are clamoring over a prediction made by the Mortgage Bankers Association (MBA). The industry group recently said they expect mortgage rates to average around 4.5% for much of 2012. But some publishers have failed to put this forecast into perspective. Here are two key points to keep in mind:

  1. We’ve had record-low mortgage rates for months now, but they’ve done virtually nothing to resuscitate the housing market.
  2. Despite their prediction for low mortgage rates in 2012, the MBA has also forecasted a decline in home-buying activity next year.

Don’t get me wrong. I like to see low rates as much as the next guy. But it’s really just a continuation of the status quo. And the status of the housing market for the last few years has been anemic, for the most part. So is this recent prediction something to be celebrated? Hardly.

[See also: 2012 housing market predictions]

From a housing perspective, there are basically two things to get excited about — job growth and inventory reduction. These are the two biggest problems in the housing market right now, and they seem to be sticking with us for the foreseeable future. The unemployment rate is still hovering above 9%, and RealtyTrac has predicted that an ocean of foreclosures will be pushed into 2012.

Unemployment weakens the demand side of the equation, by shrinking the buyer pool. Excess inventory causes equal problems on the supply side. All of this serves to weaken home prices, erode consumer confidence, and delay recovery in the housing sector.

Low Mortgage Rates to Benefit Select Buyers, Homeowners

The MBA’s prediction for low mortgage rates in 2012 is noteworthy to a small and specific audience. For well-qualified home buyers who live in stable real estate markets, 2012 could be a great time to buy a house. And for homeowners who have sufficient equity and a ways to go on their current loan payments, 2012 could be a great time to refinance.

But both of these groups are small. Currently, there aren’t many housing markets with stable or upward home prices right now. I can only think of a handful of places where I’d buy a home right now (as opposed to waiting a couple of years). And on the refinancing side, most of the homeowners with positive equity have already refinanced their homes.

These two factors are partly why the MBA has predicted a drop in mortgage originations in 2012, from an estimated $1.2 trillion in 2011 to $900 billion in 2012. “[W]e are predicting another tough year, with origination volumes at their lowest point since 1997,” said Jay Brinkman, chief economist at the Mortgage Bankers Association.

But if you do fall into one of the aforementioned “elite” groups, you should seriously consider making a move next year. Home prices are expected to start rising in most areas by 2013. Mortgage rates in 2012 are expected to remain low, but they may start rising toward the end of next year. If you’re a qualified buyer in one of the few markets that are looking up, 2012 might be your year.

Waiting for Home Prices to Hit Bottom

Low mortgage rates are certainly enticing to would-be home buyers. But it’s not enough to overcome their fears of continued price declines. By and large, consumers are more savvy and apprehensive than before the recession. We have all seen what can happen when you rush into a high-dollar investment without proper research and planning (like a mortgage payment that’s too big for you, or a house with an overinflated price tag). Many qualified borrowers are taking a wait-and-see approach for now. They don’t want to get burned by a declining market.

Home prices are low. But will they fall even lower in the months to come? This is the mindset we are seeing in a lot of our readers, based on the questions they send us.

In May 2011, we surveyed our readers to find out how many of them thought home prices would hit bottom this year. The vast majority (78%) said they expected prices to keep falling in their local areas, through the end of 2011.

Survey: Housing Market Bottom 2011

It doesn’t matter how low mortgage rates are in 2012. If consumers feel their local housing markets haven’t hit bottom yet, they won’t buy — even if they are qualified to get a mortgage loan. So the pool of willing-and-able home buyers will remain small in 2012, as it has been throughout 2011. This will further soften demand and lead to continued price erosion. The glut of foreclosures that we will carry into 2012 doesn’t help matters any.

First-Time Buyers: When to Take the Plunge

So when does it make sense to buy a house? What kind of indicators should a home buyer use? Low mortgage rates are only one piece of a much larger picture. Here are some other things to consider.

First, take a look at home-price trends in your area for the last 6 – 12 months. What does the line on the graph look like? Has it been declining steadily? Up and down like a roller coaster? Or maybe flat? This will help you determine when your housing market hits bottom. Granted, you can’t predict the future of home prices. But it certainly helps to know the past.

Next, you should find out what the experts have to say about your local housing market. I’m not talking about real estate agents here — those folks are always optimistic. I’m talking about economists, market analysts and the like. You can even use Google News to see what has been written about your market over the last few months. This is what a savvy investor would do before making a major purchase. So it’s a good practice for home buyers, as well.

You can expect to see low mortgage rates in 2012. We’ve already discussed that. But what about property values in your area? If they’re still dropping like a stone, it’s probably best to wait a while. Buy a home in a declining market, and you could end up with negative equity in no time at all.

Good Time to Buy a House

Lastly, you should check for these top-ten signs you’re ready to buy a house. You will have low mortgage rates in your favor in 2012. But what about the other ten items on this list? Can you tick those boxes as well?