We need to look at this in terms of cause and effect. The prices are out of whack here as result of investor activity and outright speculation. The low interest rates and the lack of reasonable underwriting for the credit was just an enabler.
One of my kids had an MTV show on the other day about kids getting married. Among other thing’s it showed an engaged couple of 19/20 signing escrow papers for their first house (they live in Missouri). My son was shocked to see it, and he didn’t believe me when I told him the sale price on that house might only be $60,000. Needless to say, I looked like a freaking genius to him when the camera zoomed in on the bottom line of $56,000.
My point on this is that if the current pricing were even primarily about the interest rate and the lack of underwriting then this house in Missouri (wherein these borrowers have equal access to these credit terms) would be double or triple in price. But it isn’t, and the main reason it isn’t is because that town hasn’t had investor-mania.
Lowering interest rates won’t bring back the investors because they don’t care about long term interest rates. They only care about short term flips. Without the masses clamoring to get in at any price lest their chance be gone forever, the interest rates don’t mean anything.
The only people who would benefit from lower interest rates are those mortgagees who have ARMS and who also still have enough equity to refinance into those lower interest rates. I don’t think there are enough people in that category to reverse the current market psychology, even if our economy could afford the downsides to reducing interest rates.
