As we all know by now, Ben Bernanke and the Federal Reserve Bank have injected over $1 trillion into the economy in hopes of finding a floor in the housing market while stimulating the economy.  No one knows if this will happen, but what we do know is that mortgage rates will fall immensely.  As stated in my mortgage rate predictions column, I fully expected mortgage rates to fall to 4.25% or under.  The question is, “will this put a bottom in the housing market?”  I say no.

The only way that we will see the housing market bounce is when supply equals demand.  Anyone who has taken a basic economics course knows this.  Currently, there is over 16 months of supply in the housing market.  This is the highest level in modern history.  The only way to make this number fall is to sell new homes!  There are really only two ways to sell new homes: new home buyers or individuals buying an additional home.  Most people buy additional homes as an investment or a vacation home.

It is quite possible that we will see many homes being bought by individuals who currently own a home.  Mortgage rates will fall to historical lows which will give these borrowers a chance to refinance and save a great deal of money.  By saving money, they may have the opportunity to buy a new home with their extra savings.  There is a strong possiblity that this will happen as housing prices are quite attractive in many markets.

The problem remains that individuals buying their first home do not have the capital to get that first mortgage.  It is also likely that they do not have a great deal of credit history which will greatly affect their chances of getting a low mortgage rate.  I have many friends that are in a position to buy a home but realize that their credit score is not where it needs to be.  They want to take a few more years to increase their credit score so they can get a lower mortgage rate.

I also have friends who feel it is extremely risky to buy a home in this economic crisis.  They feel like they are catching a falling knife and do not want to take on this financial risk.  As I explained to a good friend today; if you buy a new home, you will have the opportunity to get an $8000 tax credit and mortgage rates are likely to be low, but….you have to realize that you may buy a $189,000 house today that falls to $145,000 by the end of the year.  Does that $8000 tax credit sound that good now?  The unemployment rate continues to increase in most states so if you are in an area with heavy job cuts, your home could decrease even more.

Even if you do get a low mortgage rate and a tax credit, sometimes it is not worth it.  I fully expect the government will extend the $8000 first time home buyer credit until we see a TRUE bottom in the housing market.  When the months supply of housing starts to decline, it will be quite appealing to buy a new home.  It is just hard to be optimistic when you see lines to get into job fairs that look like the one at the top of this article.

When we see the unemployment rate and months housing supply decrease, then I will be extremely bullish on this economy.  Until then, I am worried that things could get much worse.