The housing sector is, for all intents and purposes, the result of several factors compounding one another. It is essentially a complex machine that responds to even the most subtle of indicators. Of particular importance, however, is the impact mortgage rates have on the entire industry. After all, mortgage rates are a critical component of the cost of a property. Who doesn’t take mortgage rates into consideration when purchasing a home? However, as recent reports indicate, low rates may not impact home ownership as much as originally anticipated. According to the Mortgage Bankers Association (MBA), rates have dropped to their lowest level in nearly 18 months, causing an 11.6 percent rise in mortgage applications. The catch: the rise in applications was directly correlated to the refinance market – not the mortgage rates themselves.
Due, largely in part, to the record low mortgage rates, applications to refinance increased an impressive 23 percent week-to-week on a seasonally adjusted basis. As a comparison, the volume of refinancing applications has reached its highest level since this time last year. Mortgage applications, on the other hand, remained unimpressive in the face of lower rates. In fact, despite very attractive rates, mortgage applications dropped 5 percent from the previous week and 9 percent from October 2013.
“Continuing concerns about weak economic growth in Europe and a few U.S. economic indicators that came in below expectations caused a flight to quality into U.S. Treasurys last week, leading to sharp drops in interest rates,” said Mike Fratantoni, the MBA’s chief economist. “Mortgage rates have fallen close to 30 basis points over the last four weeks.”
According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.1 percent, the lowest level since May 2013. As a result, traditional lending institutions are proceeding to offer the most attractive rates we have ever seen. The most credit-worthy borrowers have seen rates drop bellow the 4 percent mark, an impact that is as much psychological as it is desperate. With the economy still heading towards recovery, banks will do anything they can to receive more clients – especially those of a less risky nature. In fact, wealthier homeowners appear to be the biggest beneficiary of the low mortgage rates. The average loan balance for refinance applications increased to $306,400, the highest level in the MBA survey’s history, suggesting that wealthier homeowners are benefiting most from the drop in rates.
While lower rates do not appear to have had a significant impact on homeownership, they can’t be ignored. According to the National Association of Realtors (NAR), existing home sales did increase by 2 percent in September from August. However, it is important to note that, even with the 2 percent increase, existing home sales are still down from last year. This time last year, investors were competing for distressed properties and driving prices up. The NAR’s chief economist, Lawrence Yun, said sentiment among real estate agents was at its lowest level of the year, suggesting that sales may be weaker going forward.
“It’s turned into what I think is really a classic buyers’ market,” said Sherry Spinelli, a real estate agent with Long and Foster in Northern Virginia. “More days on market, prices are coming down, the offers are even lower and there are just a lot of houses out there, so it’s a challenge for sellers. I think you have to lower the price in order to sell it.”
Despite how low mortgage rates have proceeded to drop, they are not the biggest barrier for homebuyers to overcome in today’s recovery. Even at just under 5 percent, mortgage rates on a 30-year fixed-mortgage are historically low. Evidence suggests that credit availability, not the mortgage rate, is the hardest obstacle to overcome. With recent changes to the lending process, as to avoid another recession, banks have required higher credit scores, full documentation and strict debt limits. In order to avoid another downturn, banks have had to make drastic changes.
This week, Mel Watt, director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, said in a speech that there would soon be better clarification for banks, “rules of the road,” on how to safeguard against these so-called ‘buybacks,’ but the details were general.
“We have started to move mortgage finance back to a responsible state of normalcy—one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness of the enterprises,” Watt said in prepared remarks Monday.