Rising Mortgage Rates

2013-07-07 YTD Mortgage RatesAs those actively looking for a home can tell you, mortgage rates have risen sharply in the past two months. The chart to the right shows the average rate for a 30-year fixed-rate loan since the beginning of the year. The chart is from the Bankrate.com site.

From January through the beginning of May, mortgage interest rates bounced around the 3.5% level. But then, over the course of a little more than a month they increased to over 4.5%.

Buyers have been impacted by the change in a few different ways. Some chose not to lock their rate when they got a home under contract in the spring market, which unfortunately didn’t work out well for them. Others were surprised to be impacted. I know of one case where the buyer’s rate lock lapsed when a closing was delayed and their rate adjusted upwards by a meaningful amount, which also forced them to accept a 3 day waiting period associated with the lender’s required disclosures.

But taking a step back, what should buyers think about rates at 4.5%? The reality of the situation is that from a historical perspective mortgage rates are still very attractive. Have a look at this chart, which is based on National Average Contract Mortgage Rate data since January 1990 from the mortgage-x.com site.

2013-07-07 Mortgage Rates Since 1990

This chart ends with the May 2013 data point, so it doesn’t show the recent uptick. But still … 4.5% is lower than everything on this chart before the fourth quarter of 2010.

Another way to look at this is by quantifying the impact of the rate increase. Consider a $300,000 home that someone is buying with a 30-year loan and 10% down. Seeing the rate jump from 3.5% to 4.5% causes the monthly principal and interest payment to increase by $156 from $1,212 to $1,368. $156 per month is $1,868 per year, which does not radically change a buyer’s financial equation, but is not an insignificant amount of money either.

The big question about the current interest rate trend is this – how will the real estate market be impacted? Rising rates reduce a buyer’s purchasing power – will this scare some buyers away and force others to reduce their offers? Or will fear of rates rising even higher force buyers off the fence and actually increase demand for real estate?

Bill McBride, author of an economics site called Calculated Risk, has written about the relationship between housing prices and mortgage rates a couple times. In his first piece he noted that the negative impact of rising interest rated is overshadowed by other factors, like the positive impact of a strengthening economy. Most recently he looked at example time periods when the economy was growing at the same time mortgage rates were rising. He found this supported his conclusion that rising rates may slow price gains, but are unlikely to cause home prices to fall.

If you are considering a home purchase, how are you thinking about the rising mortgage rates?

Mortgage Terms Moving Against Buyers

Interest rates and down payment amounts are both trending upwards, according to recent articles on the current state of home mortgages, potentially reducing the purchasing power of buyers.

After bottoming out around 4.25% last fall, mortgage rates for 30-year fixed-rate loans have recently moved above 5% for the first time in about a year. Commentators observe that rising rates will cause some buyers to rethink the advantages of home ownership, but generally conclude that they are not a critical threat to the housing market.

The Wall Street Journal and Zillow reported that median down payments for “conventional” mortgages rose from about 5% at the end of 2006 to 20% in 2008 in a study of 9 cities. The article also notes that mortgages backed by the Federal Housing Administration (FHA), requiring only 3.5% down payments, have increased in popularity and were used in about half the purchases in 2010.

It seems to us that there are two separate things going on here. The first is related to the overall economy and the financial policies of the country. Mortgage rates are based on the yields of the 10-year Treasury Bond. If the creditors of the United States are demanding a higher interest rate, then those higher rates will trickle down to mortgages.

The second factor influencing mortgage terms is the continued evolution of the American mortgage industry. Lenders have taken a lot of losses from their loan portfolios over the past 5 years. Not surprisingly, they’re trying to improve their business practices to make these sorts of situations less likely in the future. What mortgage products should be available? What should lenders require of buyers? What makes a borrower creditworthy? What role will the government play?

We have no special insight into either of these two issues, or the direction of mortgage rates in general. And we suspect that nobody truly knows how they will evolve over the coming months and years. However, we do know that buyers still have an opportunity to secure financing with low down payments. And we can report that while rates are a little bit higher than they used to be, they’re still very low from a historical point of view. Your guess is as good as ours when it comes to where rates move next.

Mortgage Rates and The Fed

The Giant Doors of the Society Room in Downtown HartfordThis afternoon the Federal Reserve announced the next phase of their strategy to stimulate the economy. Broadly referred to as Quantitative Easing 2, the plan involves printing a whole lot of money in order to buy long-term US Treasury Bonds in the markets.

The Fed’s big picture goal is to reduce unemployment, and hopes that injecting more money into the economy will encourage businesses to begin taking risks to expand their operations (hire more workers), which would hopefully also boost confidence and inspire consumers to increase their spending.

Analysts, economists, and investors have been debating the merits of the expected plan for weeks. Some feel it will be modestly helpful in supporting the business environment, while others are quite pessimistic. Ultimately this sort of indirect economic stimulus relies on a chain of events, with many types of participants, so it’s impossible to predict what will happen with any level of confidence.

Commentators do seem to agree that the Fed’s move will continue the very favorable refinance opportunity for homeowners. Because mortgage rates are generally based on the long-term US Treasury Bonds, and those are the exact securities the Fed plans to purchase, rates should be directly impacted by the program. Again, there are various opinions as to how much lower mortgage rates may go, but I have not seen any articles expecting them to rise.

The refinancing opportunity appears as though it will be extended again. Homeowners with strong credit and positive home equity may want to consider improving their interest rate and/or shorting the length of their loan. Just keep in mind that there is an up-front cash cost to refinancing, so in order for it to make sense homeowners should plan to be in their property for at least a few more years. We’re happy to share our experience with the process and suggest mortgage professionals – just call or email.

Mortgage Rates are Low

Mortgage rates are currently low. Very low.

It’s common for well qualified buyers to get rates below 5%, and we’ve heard of some rates as low as 4.25% on 30-year fixed mortgages with no points. We even saw a sign by the road advertising a 3.99% rate, though it was not clear what the other terms would be.

Here’s a chart from Mortgage-X.com showing rates going back to 1963, which is further than other charts we’ve seen.
Contract Mortgage Rates since 1963 (Mortgage-X.com)
Reproduced with the permission of Mortgage-X.com


Our Thoughts on Low Mortgage Rates

1. People shouldn’t buy houses because mortgage rates are low. Buying a home is a big commitment of time and money, so homeowners need to be in it for the right reasons. Securing a low mortgage rate might be a nice bonus, but it should not be used to justify a purchase – you need to want to own a home.

2. Those in the market for a new home can take advantage of the low rates in different ways. One option is to pay less each month for the same home they would have bought no matter what the rates. Another option is to get a more expensive home for the same monthly payment they would have had before rates fell so low. Finally, they could get a shorter loan (15-years or 20-years instead of 30-years) so that they can build equity faster and pay dramatically less interest overall.

3. Existing home owners may want to consider refinancing their current mortgage. There have been a couple articles recently (CNN, Wall Street Journal) about how refinancings are on the rise again, but that many buyers can’t take advantage because of strict lending requirements (their credit is too poor) and appraisal values (their home values have fallen and they don’t have enough equity).

4. Will rates go even lower? Nobody knows. At some point mortgage rates really can’t go any lower. The two primary inputs into the rates are the interest rate of the 10-year Treasury Bond and the spread above the Treasury that lenders/investors demand. The 10-year Treasury finished yesterday at 2.64%, which is very low from a historical perspective, but it’s possible it could go even lower.

As always, the place to start with everything mortgage-related is with a mortgage professional. They’ll be able to evaluate your specific situation to let you know which options are available to you. We would be happy to pass on the names of mortgage people we’ve used if anyone is interested.

An Economist's View of the National Housing Market

Economists are divided as to the direction of the national housing market. Some believe that the environment is stabilizing and that prices will increase from here. Others see further price decreases once the government support fades away.

Richardson Building in Downtown Hartford

Barry Ritholz is one economist we follow regularly, through his posts on The Big Picture blog. Right now, he has a strong negative view on the future of the US housing markets. One of yesterday’s posts broke down his views in more detail.

Looking back at how we got to where we are today, Mr. Ritholz notes that that low interest rates throughout the 2000s caused a credit bubble, which in turn caused a housing boom. Lots of people bought houses they couldn’t afford because poor lending standards and very low mortgage rates allowed them to jump into the real estate markets. Five million homeowners have been foreclosed upon, and he expects five million more foreclosures to come.

His forward-looking thesis is that even after a 33% fall from the peak, prices are still too high when looking at traditional valuation metrics like prices vs income and the cost of owning vs renting. Supply is high, with more waiting in the wings. Demand is well below the inflated peak levels, caused by tighter credit and high unemployment. And when markets correct from severe imbalances, they usually move well below the mean.

How does his thesis translate to Greater Hartford?

Our markets did not appreciate nearly as much as markets in some other parts of the country, which has also meant that we have not seen as severe a correction. However, housing in the northeast is generally more expensive than it is/was in the boom areas, so there is more room to fall. And there is no guarantee it will always be more expensive up here.

Inventory: Real estate inventories in Hartford County checked in at just over 6 months of sales activity at the end of the first quarter. That’s right on the boundary between a neutral market and one that favors buyers, so we’re not seeing any major warning signs here. The number at the end of the second quarter should be comparable, or even better, since the tax credit created a huge spike in deals that will close by the end of June.

Foreclosures: The number of foreclosures has increased dramatically in the past few years. A recent Hartford Courant article focusing on the amount of money marshals earn indicates that “five or six years ago there were 3,000 or 4,000 foreclosures” per year in the state. Compare that to a statistic later in the article stating that 20,000 foreclosures were filed in 2009, which was 40% more than 2008.

Employment: The employment situation in Greater Hartford has improved over the past year. People we talk with say that companies are adding employees, though many positions remain unfilled and may never be filled. We are also seeing more relocation buyers coming from out of town, which of course means that they have jobs waiting for them. That’s the short-term view. The long-term view is more negative. One of our major employers has gone on the record saying that they want to move jobs anywhere outside of Connecticut. The comment made headlines, but nobody seemed especially surprised by the news. The housing market depends on buyers with steady income, which depends on employment.

Credit and Mortgage Rates: Buyers with good credit are able to get mortgages, and are currently seeing very low rates. However, buyers with poor credit are having trouble financing a purchase and often have to sit out of the market for a year or two to repair their credit. We know of numerous buyers in this situation – all of whom are gainfully employed.

Overall, the environment in Greater Hartford is trending in the same direction as the national picture for three out of four areas that Mr. Ritholz identifies as concerns. It’s difficult to know how severe our readings are relative to the national average, but it seems like we may be at risk for falling prices if his analysis turns out to be correct.