Mortgage rates drop below 4% again
A flurry of refinancing follows, but vast numbers of 'underwater' loans continue to weigh down the housing market.
This post comes from Marilyn Lewis at MSN Money.
Mortgage rates dropped just a smidgeon this week, falling below 4% and breaking an important and historic psychological barrier for the second time this year.
The average 30-year, fixed-rate mortgage now sells for an average 3.99%, according to the Freddie Mac's Weekly Primary Mortgage Market Survey. To get that rate, homebuyers and refinancers are paying an average 0.7 point (a point is a fee, about 1% of the loan amount.)
In reality, this is a wee drop from last week's 4% average. Likewise, the 15-year fixed-rate mortgage dropped a hair, from 3.31% to 3.30% with a 0.8 point paid.
It was the second time this year that rates breached the historic 4% barrier. On Oct. 6, Freddie's survey reported rates had fallen to 3.94%, the lowest recorded by the survey, which began in 1971. At this time last year, 30-year fixed rates were 4.17%, which seemed impossibly low at the time.
The Christian Science Monitor's Paper Economy blog has an inpressive chart illustrating the trajectory of rates since 2007.
But with access to credit still tight and 28.6% of American homes with negative equity or "underwater," and therefore ineligible for most lenders' refinancing programs, the low rates are doing the economy little good, if any.
The drop in borrowing costs has done little to spur home sales as as tighter lending standards, an unemployment rate around 9% and declining property values erode buyer confidence.
The article continues:
"Low interest rates are having hardly any effect," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. "They might help a little, but so little it doesn’t show up in the data. Maybe the data would be worse if mortgage rates were 5%."
The low rates have caused a modest boom in refinancing, but that trend also might be waning. Most people who are creditworthy enough to refinance have already locked in rates below 5%.
Still, the low rates moved the needle of the Mortgage Bankers Association’s Weekly Mortgage Applications Survey. In the week ending Nov. 4, purchase applications increased 10.3% from the week before. Refinancings, which were 78.6% of all the mortgage sales, increased 12.1% from the week before. Post continues below.
Mike Fratantoni, an MBA spokesman, attributed the ultra-low rates to demand for U.S. Treasurys sparked by economic turmoil in Europe and a "flight to quality" of investment capital. Demand for Treasurys is linked to low mortgage interest rates. (HSH.com describes the link here.)
Home sales in September dropped 3% from August (October data will be out Nov. 21). But they're up 11.3% over this time last year, according to the National Association of Realtors. The market for resale homes has stabilized, but at a low level, according to Lawrence Yun, the NAR's chief economist:
“The irony is affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010. Even so, the volume of successful buyers is higher than a year ago and is remaining fairly stable – this speaks to an unfulfilled demand.”
"Many Americans don't want to sink money into a home that could possibly lose value the next three to four years," USA Today writes.
The negative-equity trap
CNBC's Diana Olick said, "The lower those prices go, the more American borrowers fall into an negative equity position; that is, they owe more on their mortgages than their homes are worth."
Olick quotes mortgage analyst Mark Hanson, who says the problem is even worse than it appears:
Over 50% of all mortgaged households in the U.S. are effectively underwater -- unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. Because repeat buyers have always carried the market as the foundation, this is why demand has not come back. It's as if half the potential buyers in America died over a two-year period of time.
Hopes now are pinned on an upcoming revamp of the government Home Affordable Refinance Program (HARP) to include mortgages that are underwater by any amount. Details are expected later this month.
The HARP changes could help a good number of underwater borrowers refinance, bringing their monthly payments more in line with the true value of their homes which at least could discourage them from walking away from the mortgages. Borrowers whose loans have negative equity are most at-risk for strategically defaulting.
Here's a Washington Post article outlining the eligibility requirements. Your loan has to be owned by Fannie Mae (find out if Fannie owns your mortgage) or Freddie Mac (see if Freddie owns your loan.)
More on MSN Money
'lucky i saw the light before the ruined my credit'. Its really amazing how fiance works in this country and how the banks want to work against you constantly (Now that they ruined the country along with the people that drew up the loan applications a few years back and approved everyone who didn't have a pot to piss in). I wish I had a solution or at least a direction without me knowingly drowning in one bad decision after another...I am not a pessimist, I'm more of an opportunist BUT I know when the cards are against you...you fold...which is EXACTLY what I'm doing.
With the country being in such deep debt the government can't afford to increase the interest rates. It would just cost them way too much. With the USA debt up to 12-13 Trillion, an increase of 2% interest rate costs the US tax payers more than 240 billion per year.
If we hit Jimmy Carter interest rates in the USA we would add 1.8 Trillion a year in interest alone to our debt, That is more than our entire federal payroll. Just sayin
The best thing to do is give loans at 4% to people with good credit . this loan could be used
as personal loan. (no closing cost, no hidden fees) it could be $40,000 PER FAMILY.
this money will be line of credit for people with good credit. they have to pay interest only
on this sum, for a period of 5 to 10 years. after that the principle kicks in with interest adjusted to the market condition at that time.
This will ease up financial difficulties for many families. This will help the economy on
long run since it will be used for buying things or freeing big payments to credit card companies which amounts to 15 to 20% in interest. get them out of debt.
they spent all that stimulus money in wrong things. this did not create any long term jobs. its the people who creates the economy. giving money to banks to offset losses have frozen the money in bank. give it to families with good credit with a maturity date. interest only payment will offset huge debt people hold due to down turn in the economy.
this money will flow in the economy and drive the nation out of bad times. i could be wrong but this may help the economy. individuals to get $25,000. many gurus may think this is a bad idea. but at least it will work. throwing money at things that didn't work wont work. but this money to people will work. just an idea.
The negative-equity trap
Isn't that like the death spiral of deflation? How long is it going to be before Congress and the Fed to understands that inflation isn't the problem. The housing bubble bust of 2008 is only getting worse. And it is going to take down the rest of the economy .. if nothing is done to correct the problems.
Guys, here in New Zealand we are paying about 5.7% floating and 1 year fixed is 5.79% and 2 years fixed is 6.09% , there are no such things as 30 year fixed term mortgages...
So our $350,000 mtge costs alot each month...
Credit cards are around 22% per annum.
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