Sunday, August 15, 2010

How low can they go? (Mortgage rates that is...)

So, mortgage rates dropped to an average of 4.4% last week. The lowest in 40 years, with no expectation that they will increase significantly in the near future.

It was just a few months ago that the published conventional wisdom thought rates could increase from their already low rate of around 5% to 5.5 or even 6% by the end of the year because the Federal Reserve was ending their purchases of mortgage-backed securities. Then all kinds of goofy things took hold: Greece and Spain debt problems caused investors to rush into Treasuries, causing rates to take a step down, then sluggishness in job creation and fears of a double dip recession pushed them down a bit more.

The latest move down was spurred in part by last week's Federal Reserve announcement that they would buy Treasuries as some of the mortgage securities matured. That took the fear level up a notch and now the only thing it seems people want to buy are Treasuries. I'm not sure whether that was the intended effect of the announcement, but it did manage to take rates to their current lows.

Gauging effects

For those in position to do so, the rush to refinance is on. Lenders across the area are handling high volumes of refi applications. Purchase applications on the other hand - not so much - but at least rising a bit.

One of the positive effects is that lower rates increase housing "affordability." That is, more individuals qualify for higher loan amounts. With underwriting standards the tightest they've been in at least a decade, that is no doubt beneficial. The follow on impact is that as more people qualify for higher loan amounts, it increases the potential number of buyers at any particular price point - thus helping stabilize home prices via increased demand.

All of this also helps begin to balance out rising rental rates. As more people have been shut out of the mortgage market (or have been through a foreclosure), rents have been on the rise. This pushes the demand cycle for home ownership even more as rising rents cause people to assess whether renting vs. owning is the best financial option.

Can rates go lower?

In "effective rate" terms, mortgage rates were lower in the early 70's. That's because the difference between the inflation rate and mortgage rates were less. Several economists do suggest that we could still see rates go down a bit further, but that they probably don't have too much room left. Banks are already borrowing at stunningly low rates (i.e., from 0 - .25%), and to lend out money on mortgages they probably have to make at least a couple of points above what they can make buying Treasuries to account for the risk factor.

In May of this year, the National Association of Realtors reported that the home affordaboility index had neared an all time high. It has since pulled back a little bit, but will likely head higher with the summer slowdown in activity and dropping rates. As the economy eventually picks up steam, the stimulus effect being pushed through low rates will probably be withdrawn and rates will start to rise again. The million dollar question, of course, is when that might actually happen.

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