Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Why a Government-Sponsored, Low-Interest-Rate Refinance Program Would Kill The Housing Market

Rumors are circling that the FHA will implement a new, ultra-low interest rate refinancing program to help cash-strapped borrowers. This plan has an unintended consequence that would devastate the housing market for years to come.

Borrowers will have a HUGE incentive NOT to move in the future. It's as if the government was going to pay a portion of your mortgage in return for you NOT moving for a decade or two. This is insane.

Simple Math

For example, let's assume a $200,000 home with 20% down and a loan of $160,000. Now, let's assume a 3.5% interest rate (about 1% below today's rates).

The borrower would have principal and interest payments of $718.

Fast forward 5 years.

Pretend that homeowner wants to move do a different house that costs $200,000. Let's again assume 20% down.

At a reasonable 6% interest rate, the borrower would pay $959 a month. That's an extra $241 each month in interest!

Unless they are absolutely forced to, these homeowners simply will not move.

Here in the Bay Area, let's use an example of a $500,000 mortgage on a $500,000 house (it is FHA, after all ).

At 3.5% that's principal and interest of $2,245 per month.

Five years later, if they wanted to buy another $500,000 house at 6%, the payments would jump to $2,997.

To achieve a similar payment to what they had, the purchase price on the new house would have to drop to about $375,000.

They are trapped in their homes unless they choose to accept a big downgrade for the same expense!

Market Stagnation

As a result of this ultra-low-interest refi program, more people will choose not to move. This immobility hurts job productivity and flexibility. Low housing turnover makes markets less liquid, hurting everyone. And, even worse than the tax credits, we could see years of mortgage refi demand pulled forward. Fine now...but then what?

Proponents would argue that a refi boom would spark economic activity today. But, once that temporary boost is realized, we've got even less economic spark to look forward to in the future.

Just like everything else that's happened over the last 2-3 years, The Powers That Be are trying to kick the can a little further down the road.

And, that poor borrower is stuck with $500,000 in debt instead of $375,000.

Disclosure: No Positions