By just about every measure the housing market is looking better — home values of the rising, new construction is on the increase, foreclosures are down and millions of people have gotten mortgages to finance and refinance their homes in the past few years.
What then could possibly be the problem at this time?
“The mortgage market cratered in the fourth quarter of 2013, Wells Fargo and JPMorgan Chase reported on Tuesday, as higher interest rates all but murdered demand for mortgage refinancing,” reports the Huffington Post.
“Higher rates have hurt demand,” says Huffington. “The average interest rate for a 30-year fixed-rate mortgage has jumped to 4.5 percent from a record low of 3.3 percent in early 2013, according to government-backed mortgage giant Freddie Mac.”
I find two problems with this analysis.
First, I do not believe that mortgage demand has been “murdered” or even wounded. Instead, today’s mortgage activity merely reflects the natural ebb and flow of supply and demand.
Second — and I hate to mention this — interest rates in the area of 4.5 percent are ridiculously low, the very rates most people during the past several decades would’ve been elated to obtain.
Let’s start with mortgage demand. Today’s rates are simply not hurting mortgage demand in any material way. How do we know this? Because the Mortgage Bankers Association says that it expects lenders to originate more purchase money mortgages this year than in 2013.
“Compared to 2013, purchase originations are expected to increase by 3.8 percent,” said Mike Fratantoni, chief economist for MBA.
But while the demand for purchase money is increasing the zeal to refinance is ebbing. In fact, the MBA says refinancing activity this year is expected to be about 60 percent lower than 2013.
Sixty percent lower!
As Huffington points out, rates have gone from roughly 3.3 percent in late 2012 to around 4.5 percent today. Borrowers, being rational, have flooded the market seeking to refinance during the past two years. This means that the pool of potential borrowers who want to trade new loans for older ones has gotten smaller. Even with the best marketing in the world few people are going to see the benefit of trading low-rate mortgages for more expensive ones.
However, if home prices keep rising then the MBA’s 60-percent estimate is likely to be off. The reason — as RealtyTrac explains — is that 9.1 million people are deeply underwater, an expression which means that mortgage debt is at least 25 percent greater than the value of the property.
The good news is that the number of properties in the “deeply underwater” category is 1.4 million smaller than a year ago. If home values keep rising, if equity keeps growing, then more and more people will be able to seriously consider a new loan. For many of them, a mortgage at 4.5 percent will be a financial windfall.
Next, it should be pointed out that mortgage rates in the 4.5 percent range are hardly usurious. As Standard & Poor’s reports, the average mortgage rate during the past 40 years has been 8.6 percent.
Think about this in terms of a $300,000 mortgage. At 8.6 percent the monthly cost for principal and interest is $2,328 over 30 years. The same loan at 4.5 percent has a monthly expense of $1,520.
While financing at 4.5 percent is not as good at 3.3 percent it’s a whole bunch better than 8.6 percent.
That may be of little comfort for people who could not refinance in 2012 and the first half of 2013, but today’s interest rates are far from steep. By historic standards they’re laughably low.
Higher Mortgages Rates Coming?
The Huffington Posthas it backwards when it comes to interest rates. The problem is not that rates are so high borrowers fear financing and refinancing, it’s that mortgage rates at this time are so low lenders do not want to offer such loans.
“Would you lend money fixed for the next 30 years at a rate of less than 5 percent?” asks Felix Salmon, writing for Reuters. “Mortgage rates might still be well above the rates on mortgage bonds, but on an absolute basis, they’re still incredibly low. If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels.”
So that’s the story. No murders in the market and few borrowers are overwhelmed by the thought of mortgage financing at 4.5 percent. Instead, loan activity is decreasing because many borrowers have already refinanced to mortgage rates which are better than today and many prospective lenders fear that by making mortgages at this time they may be locked into rates which are low and unattractive compared with the opportunities ahead.
Mystery solved — and no murder was found. The changes in the marketplace are simply the by-product of natural causes.