I don't know--and neither does anyone else.
I am in the middle of a project with Chris Redfearn and Stuart Gabriel that looks precisely at this issue. Our finding is that capitalization varies a lot by time and place. The coasts are different from the middle of the country; the period before 1997 is different from the period after. When we do rolling regressions across time to attempt to identify capitalization effects, we get very unstable coefficients.
This is not to say borrower relief is a bad idea--I have come around to the view that we need to do it (although I would like to see clawbacks). But let's not kid ourselves--we have no good model to predict the effectiveness of any policy right now.
Richard, Sadly it seems that the politicians are shouting from the rooftops that relief is on the way,and rates will fall making mortgages more affordable.
ReplyDeleteWhat is NOT advertised, is Fannie and Freddie surcharges for credit risk and above par loan pricing.
Rates advertised are generally only available to those with credit scores of 740 and above. Any score below 740 will have an add-on for price that translates to higher rates.
I apologize for using this forum as a place to sound off, but I'd love your comments on what changes you feel will finally trickle down to the public after the politicians approve a final draft of this program. We all know that Fannie and Freddie have to then figure out how they can make it work profitably...will any true savings be found when all is said and done?
Doesn't the mortgage rate basically influence the demand for the property, while price is set by supply and demand? When supply is really inelastic you might expect full capitalization, while a flat supply curve just ramps up production. And I would think supply would be pretty elastic right about now.
ReplyDeleteI have a paper that gets a capitalization rate over 1. but that was a circumstance in which only a handful of properties got the non-market rate - in that case it was forced assumption of above market rates, so you got essentially negative capitalization. But supply doesn't really enter in for a case like that.
If 20% down becomes the new standard, it shouldn't present an insuperable problem when rates rise. Prices will probably fall a bit, but not 20%. That is, as long as another bubble is not allowed to form.
ReplyDeleteI have a few questions:
ReplyDelete1. Suppose someone recently (July 08) purchased a home for 2$80,000; placed 10% down; then had the "10/80" loan for the remainder - should they use any upcoming legislation to reduce the interest rate on their loan (6.3%)?
1. What exactly does "full capitalization" mean? I'm still learning all about this stuff.
Thanks.
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