Will Interest rates drop to 4.5%?

Could mortgage interest rates drop to under 5% or even as low as 4.5%?

Chances are that mortgage interest rates will drop dramatically in the first few months of 2009.

In a December 4th report on ABC news, anchor Charlie Gibson was joined by economic reporter Betsy Stark. Ms. Stark brought news of a plan being considered by the Treasury Department to drastically cut interest rates to stimulate the nation’s ailing economy.

Below are some distressing economic statistics:

· The National Bureau of Economic Research recently announced the U.S. has been in recession since December 2007.

· The Institute for Supply Management reported the index of manufacturing activity for November 2008 was the lowest since May 1982.

· In early December 2008, the Commerce Department reported October numbers for factory orders dropped 5.1%, the largest decrease since July 2000.

· There are more than 4.6 million homes for sale in today’s declining real estate market.

· In 20 of the nation’s major cities, home prices have dropped for the last 21 months in a row.

Economists believe that home sales are a major contributor to the nation’s economic health. If this is the case, bringing home sales back up should go a long way in repairing our struggling economy.

Home sales historically increase when interest rates are low. So the government is doing its part.

In the week prior to the report, the government injected $600 billion into the nation’s mortgage financing system. The cash was intended to bring mortgage rates down and boost home sales.

The move helped.

Mortgage rates have steadily dropped since then and are averaging in the low to mid 5’s. Mortgage applications increased as well—up 112%. More than half of the applications were from homeowners hoping to re-finance. The lower rates are helping some strapped home owners stay in their homes.

Professor Kenneth Rogoff, Economist, agrees that the best way to get the economy off life-support is to aid homeowners.

Home ownership has historically represented the American dream. Until the collapse, buying a home was thought to be one of life’s safest investments. Consumers must now be convinced that a home is a sound investment for their hard earned money.

Professor Chris Mayer of Columbia University’s School of Business says his research suggests that 1.5 million to 2.5 million buyers would enter the market if rates on new home purchases drop to 4.5%.

The Treasury Department is considering a plan to drop interest rates into the mid 4’s. Economists agree that a significant drop in interest rates would be a great help in luring nervous and hesitant buyers back into the market.

However, any plan to drive rates lower will likely not be implemented until the new president takes office.

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