Excerpted from the latimes.com:
The Federal Reserve’s latest effort to prop up the economy has dropped mortgages into once unthinkable territory, with 30-year fixed-rate loans available for less than 4% — a record low.
For people lucky enough to still have their credit ratings, bank accounts and home equity in good shape, the change means the opportunity to refinance at rates that once seemed unimaginable.
“I can remember when I thought 7% was a great loan,” said Roger Hornbaum, a retired city of Orange employee who has already refinanced his home on California’s Central Coast twice since purchasing it last year. “After the news this morning, maybe I’ll be getting another call from [my mortgage broker] and be trying it again sometime soon.”
Hornbaum’s broker, Jeff Lazerson of Laguna Niguel, said clients who pay closing costs and a 1% fee to him are refinancing into 30-year fixed-rate loans at 3.75%.
Of course, these days many people are in no position to buy or refinance a home. Many can’t meet the stringent lending standards that have prevailed since the housing bust and bank bailout, or they owe so much more than their house is worth that they can’t get a new loan at a better rate.
“The phone is ringing off the hook with people who want to refinance,” said loan officer Darin Hardin at Premier Mortgage Group in Ladera Ranch. “But the property values just aren’t there.”
The record low rates are driven by the Fed’s announcement Wednesday that it would load up on purchases of long-term government bonds and mortgage securities. The extra demand was intended to drive down long-term interest rates, including those for home loans — and it worked.
The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgages, had closed at 1.94% on Tuesday. By the end of the day Wednesday it had dropped to 1.86%, and it plummeted Thursday to 1.72%, setting a record low before rising again Friday to 1.83%.
For a 30-year fixed-rate mortgage, the typical rate for solid borrowers had been 4.09% last week and early this week, according to mortgage finance giant Freddie Mac. That’s within a whisker of the record low of 4.08% set in 1950 and 1951. The Fed’s action dropped it well into record territory.
Mortgage professionals said many companies were making loans slightly more expensive Friday because their loan pipelines were full of more refinance requests than they could easily handle.
But should the 10-year Treasury yield stay low, there appears to be room for mortgage rates to fall further, industry experts said.
With a 1-year-old daughter, Joseph and Allison Dillard would normally be prime candidates to stop renting and buy a house.
He is a software engineer and she has a master’s degree in mathematics that should allow her to find work when their daughter is older. They have saved enough money for a 20% down payment on a single-family home in Mission Viejo or Laguna Hills, or perhaps a town home in Irvine, she said. And they have been pre-approved for a loan through Hardin, the Ladera Ranch mortgage banker.
Having looked at homes off and on since early this year, the Dillards stepped up the search this month after Joseph settled into a better new job at Google Inc.’s offices in Irvine. But they haven’t taken the plunge into ownership.
“The mortgage rates are so low but we’re worried, because we don’t know much further housing prices will fall,” said Allison, 30. “We’re trying to gauge the potential risks and benefits.” In any case, the Dillards figure, the economy’s precarious state means they’ll have at least another year before interest rates rise significantly. “It doesn’t seem like they’ll be jumping up any time soon,” she said. “So that’s not motivating us to do anything right away.
(please see comment section for discussion)
Of course the reporter didn’t bother to ask what is motivating these potential buyers, but let’s review.
They sound like first-timers, and say “We’re trying to gauge the potential risks and benefits.” Let’s note that they will not find much quality help available, if any. So like most, they’ll be overly cautious because all they’ll hear is “buy, buy, buy” from agents.
Overly cautious, or casual buyers will search the internet and cruise a few open houses…..or maybe hit some blogs. They’ll be looking at the OPTs that aren’t selling, and keep coming to the conclusion that prices have a ways to fall.
Then rates will go up, and they’ll have more reason to wait and see if prices fall, as a result. because that’s all they’ll be hearing on the blogs/MSM is that rates cause prices to fall.
But sellers will be very resistant to lowering prices, and another year or two (or more) will go by.
Repeat for years to come.
I think a better strategy is to keep an eye out in earnest for the right house, and if found, pursue it vigorously to buy at the right price.
Higher rates don’t necessarily cause housing prices to fall – see the late-70s/early-80s for a good example; housing prices continued to rise even as rates rose. Why? Because rents – the alternative to ownership – were rising in line with rates (and overall inflation). The question is NOT whether or not rates will rise; it’s whether or not rents will rise in line with rates. Looking at rates in a vacuum is counterproductive – whether or not housing prices will fall will depend on the relationship between rates and rent inflation.
Think about buying a house with a 4% 30 year mortgage right now. If inflation rises (as it surely will, there are two wars to pay for at the moment – remember Vietnams monetary cost) the present cost will seem very low. In timing the propety market an accuracy of 2-3 years is exellent.
Incomes aren’t rising. I haven’t got a pay raise in 3 years, yet everything is more expensive.
Generally you buy a home and your mortgage is 28% of your income…and over time with promotions and pay raises that percentage is lowered so you generally “grow into” your home. And that assumes that you keep your job.
So much uncertainty in the job market is also fueling this housing crisis.
Thanks Mr. Pu,
It’ll be an interesting test on this cycle too, because pressure on rents should continue if the economy is struggling and consumers have a lack of confidence about buying a home.
On the other hand, prices could fall even though we have the lowest rates in 50 years, so some unpredictable times ahead!
The bad economy, wage stagnation and higher unemployment will continue to force housing prices downward. The government/banks can try and fanagle as much as they want to. In the end, the market always wins. Fair value will be achieved.
As rainman would say: “Wait… yeah, definitely wait”.
You don’t know that.
One of the underlying problems is people are adverse to taking on debt. For years we’ve been more than willing to take on ever increasing amounts of debt, but people are now seeing that taking on debt isn’t always a good thing.
We just went through a once in a lifetime housing bubble and it’s just going to take some time before people give up on it coming back. When people give up on it’s only a matter of time before prices come back we might find a bottom. Until then it’s going to be more of the same. Adapt to the market we have or be disappointed.