Cheap Mortgage Rates Fail To Spur Housing

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

You know that there's something wrong with housing when sub-5% 30-year fixed rate mortgages can't inspire buyers to budge. The MBA said mortgage applications dropped last week, despite hovering at 4.75%, yet existing home sales fell unexpectedly by 2.2% to an annual rate of 5.66 million units in May-new home sales are expected to drop nearly 5% when they are released later this morning.

An optimist might point out that existing sales were up 17.7% from a year ago, while a pessimist would say that we are piling up inventory, bringing the current supply of homes to 8.3 months (the peak level of supply was 11.2 months in 2008). Prices usually fall when inventory levels are above six months. Uh-oh.

Housing experts blame the expiration of the tax credit, which is not a good reason to extend it yet another time. In fact, the housing and mortgage markets are functioning in a rational manner: with lots of houses on the market, buyers are taking their time. Additionally, amid tight lending conditions and plenty of underwater borrowers, it's hard to qualify for a re-fi. Taken together, mortgage demand has dropped.

I don't think that we're about to see another massive collapse in the market, but with the supply of homes outstripping demand, prices could fall another 5-10%. The bottom line: we're going to have to wait for the housing market recovery to unfold the old fashioned way: allow market forces to burn up supply and find the proper level for prices.

Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.