2008 December 26 Friday
Big Interest Gap Between Big And Small Sized Mortgages

Mortgage rates are about 2% higher in areas with expensive housing.

The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.

Wide Spread

The difference between the two averaged 2.13 percentage points in December, 10 times the spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record. If current rates reflected the historical difference of 0.2 percentage points, jumbo borrowers with an $800,000 mortgage would save $913 a month.

This provides a measure of how much Freddie Mac and Fannie Mae lower the cost of mortgages. Freddie and Fannie will only buy mortgages worth $417,000 or less (actually, there are exceptions that range as high as $729,750 depending on local housing costs). That higher cost for mortgages on more expensive houses is causing them to fall more in price than houses that qualify for cheaper mortgages. Note, however, that the more expensive market of California saw much more housing price inflation than most of the US. So these housing price declines are bringing houses down to a less distorted level.

The elite expert response continues to be that we should reflate the housing bubble.

“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview Dec. 22. “We can fix this by lowering mortgage interest rates.”

Any dumb idea worth doing once is worth doing twice? Why is that? Let me bore you with repetition: The housing price-to-rent ratio and price-to-income ratio have to return to historical trends.

Share |      By Randall Parker at 2008 December 26 02:04 PM  Economics Housing


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