Don't look for the Federal Reserve's rate cut to revive the housing market.
Mortgage rates already sit near historic lows. But larger forces are aligned against a revival: Falling home prices, tighter lending standards, and rising unemployment all are limiting how many people can buy homes, and how much they can spend.
"No matter what happens to mortgage rates, housing is not going to turn around," said Patrick Newport, an economist with the forecasting firm Global Insight, of Waltham, Mass. "Lower borrowing costs help a little, but the problem right now is that you're buying something that's losing value."
The Fed acted yesterday to reduce the cost of short-term loans to businesses and consumers, including credit card and car loans, hoping to contain the economic damage caused by the housing downturn.
The action doesn't directly affect mortgage rates, which are determined by investors' decisions on where to put money, between, for example, stocks and bonds.
But investor reaction to the Fed's shock therapy could move rates in the next few weeks - lower, if they believe the economy is worsening, or higher, if it seems to be reviving.
Rates now average about 5.7 percent, down 1 percentage point since July and approaching the record low of 5.23 percent set in June 2003.
During the first half of this decade, similar rates sparked refinancing stampedes, pulled first-time buyers into the market, and contributed to a prolonged economic expansion.
Now, lenders say the lower mortgage rates are prompting increased interest from potential borrowers, but mostly they are people who own homes already.
The Mortgage Bankers Association says applications for refinance loans soared 18.2 percent over the last month, while applications for loans to purchase homes barely budged. The association reported 63 percent of applicants want to refinance, up from about 50 percent last year.
"We've seen more refis than we ordinarily would see," said Bill Mullin, president of NE Moves Mortgage, an arm of Coldwell Banker Residential Brokerage that specializes in lending. He said he was optimistic that home buying also would increase in the spring.
But rates are just part of what makes a home affordable and attractive as an investment. And all the other parts have gone wrong simultaneously.
Tighter lending standards counteract the impact of lower interest rates. A lower rate makes it cheaper to borrow a dollar, which means a person can borrow more dollars. But tighter standards reduce the number of dollars a person can borrow - or prevents him from borrowing anything at all.
Falling housing prices might seem to be a remedy, allowing people to purchase a home for less money. But many people are waiting for prices to stop falling, while others can't buy until they sell the homes they own. And economists say prices are likely to keep falling into 2009.
The souring economy is leaving people with less money to spend on housing.
"Buying a house right now is really risky," said Newport, of Global Insight. "In many cases, it's smarter to rent."
The moment remains ripe for those who can qualify for a refinancing loan. Mortgage rates have dropped 1 percentage point since July. On a $300,000 loan, that's a difference of about $200 a month. History says the bottom is near.
And waiting has its own perils: While rates are dropping, lenders continue to tighten qualification standards.
"Borrowers gambling on lower rates could find tighter underwriting guidelines throw cold water on their plans," said Greg McBride, senior financial analyst for Bankrate.com. "If you're in the market to refinance and you can qualify for a loan, do it now, because the underwriting guidelines are just as much a moving target as interest rates."
Also, mortgage rates could start rising again, even if the Fed keeps cutting short-term rates.
The interest rates on mortgages are determined by investors who bid to purchase loans from mortgage companies. The price goes down when competition increases, generally because other investments seem less attractive.
If the Fed succeeds in turning the economy, competition to buy mortgages may decrease, which would tend to increase interest rates, undermining the largest factor working in favor of the housing market.