By keeping rates low, the hope was that more people would be motivated to buy homes. And when that didn't happen, fingers of blame were pointed in the direction of more stringent lending standards. People can't qualify for loans, can't avail themselves of the low rates -- so went the bank-bashing.
But along came some numbers that tell a different story. Yes, lending standards are making it tougher to qualify for loans now, but the reality is that fewer people are even trying. The national Mortgage Bankers Association, which tracks new mortgage applications weekly, says those applications were down 14.9 percent last week from one week earlier. The group expects to see mortgage originations fall from an estimated $1.2 trillion in 2011 to $900 billion in 2012.
Could it be that when Federal Reserve Chairman Ben Bernanke announced that the low interest rates would be around through 2013, buyers just plopped back on their couches waiting to see if the housing prices would fall even further?
The 'Luxury of Waiting'
"By keeping rates low for two years, you gave buyers the luxury of waiting to see if the market is at the bottom," says Paul Habibi, professor of real estate at UCLA's Anderson School of Business Management. "Why wouldn't you wait if you were a buyer?" he asks. "There are no expectations of home value appreciation, so all that low interest rates have done is create a big holding pattern in buyer behavior."
So should we be praying for rates to start creeping up?
"Rising rates are absolutely a better motivator than falling ones," says Dan Green, loan officer with Waterstone Mortgage, who runs the award-winning TheMortgageReports.com website. He notes that for the second straight year, low rates sparked a boom in refis, but did little to help the purchase market.
It's kind of maddening for mortgage guys like Green who underscore that a 1 percent mortgage rate drop, like the one we've had since last year, translates into an instant 11 percent increase in purchasing power.
"Falling mortgage rates do more to help home affordability than falling home prices," he says. Yet still no one is buying.
Which leads to the next line of thinking: If lower interest rates immobilized buyers, might not rising rates serve as a cattle prod? A few good pokes in the bellies of reluctant buyers might just get them off the couch and back into the game.
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