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Interest Rates Drop In Falling Economy

If there's any light at the end of this tunnel in the economy, real estate agents and mortgage lenders point to home loan interest rates. Hovering in the 6 percent range, the 30-year fixed rate has hit a historic bottom. According to industry experts, not ever since the late 1950's have mortgage rates dipped this low.

"I've been in the business 15 years and this is definitely the lowest I've ever seen," said Bill Hodgson, an agent with Bankers Mortgage Funding in San Jose.

While interest rates are subject to change daily, in the last few weeks they've hovered between 6.1 percent and 6.75 percent. The low rates are an effort by the Federal Reserve to encourage spending in a time when layoffs are prevalent and stocks are down on Wall Street.. Experts refer to the rate reductions as "banking logic." When the Fed cuts interest rates, mortgage rates follow closely behind.

What this means for lenders is big business from homeowners looking to lower their monthly mortgages. During the spate of home buying in the dot com frenzy of 1998 and 1999, people often paid above market value to own a piece of the American dream. Now they're reassessing.

"Everybody wants to refinance," Hodgson said. "And at the same time, which causes a bottleneck in the system."

His small staff of four loan officers is handling at least 10 refinancing requests a day. That's up from two a day six months ago. Hodgson predicts this year's lending volume will double last year's.

The surge in applications causes the refinancing system to slow down. Hodgson has had loans sitting in limbo, waiting for approval for 45 days or more. He said it's a process that usually take 30 days at the most.

"A lot can change with interest rates during that time he said.

Most of the loan requests coming across his desk range between $300,000 and $400,000. One stipulation when granting loan approval is that the loan amount must not exceed 80 percent of the home's value. Any amount over that requires private mortgage insurance. Also, the loan monthly expenses must not add up to more than 38 percent of a person's gross monthly income. Failing any of these prerequisites stops the loan process before the first paper is signed, said Hodgson.

According to Hodgson, the Fed's motive behind dropping interest rates is to lift the economy out of its recent slump. He said when people are able to shave off even $100or more from their monthly payments, it makes them feel better about spending in other areas such as clothes, cars and entertainment.

Low interest rates aren't enough to spur home buying, especially in the Bay Area where prices still rank among the highest in the country. When a three-bedroom two- bath house on Cowper Street in Palo Alto is listed for $3.9 million, finding a buyer requires more than a cheap loan.

Brian Sutton, a post doctorate student at Stanford University, has spent the last two days packing up boxes and loading the U-Haul truck sitting in front of the one-bedroom house he's rented for the last year in downtown Palo Alto.. Sutton is moving to Houston, Tex., partly because the possibility of buying a home there is realistic for him.

"I'd like to stay here but I'd never be able to afford a decent house," Sutton said.

Len Robinson, a real estate agent in Menlo Park, refers to his industry as one that constantly flip-flops between what's best for sellers and what's best for buyers. "It's a cyclical business," Robinson said. "Right now we're on the buyer- is-king cycle and that is going to stay for a while."

How the overall economy will fare from this change in interest rates is still a question. . Robinson said the true effect should be clear by January. "Then it will be time to evaluate and take another look."

Hodgson said the history books are a strong indicator of what's ahead.

Because the rates are so low, if history repeats itself, the economy will be stimulated and things will get better, Hodgson said.

But matter how low the rates drop, that three-bedroom, $4 million house on Cowper Street in Palo Alto will be affordable to only a small percentage of home shoppers.