What to Do With Lowest Mortgage Rates in History?

The Mortgage Corner

Mortgage rates are the lowest since the Mortgage Bankers Association survey began in the 1970s, at 3.91 percent for the conforming 30-year fixed rate, but actually lower with many lenders. I am seeing rates as low as 3.25 percent for the conforming 10-year fixed ARM that is adjustable for the remaining 20 years, with 0 origination points.

Graph: Calculated Risk

This hasn’t boosted mortgage applications much, however, as the MBA’s Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 5.5 percent but is 14.4 percent above April 2011.  The data reflects contracts but not closings.

NAR chief economist Lawrence Yun, said a one-month setback in light of many months of gains does not change the fundamentally improving housing market conditions.

“Home contract activity has been above year-ago levels now for 12 consecutive months. The housing recovery momentum continues,” he said. Existing-home sales seem to show momentum, as existing sales rebounded in April, helping to set aside some of the worries about upwardly skewed seasonally adjusted data during the atypically warm winter. Sales posted a 3.4 percent increase, following a 2.8 percent decrease in March.  Gains were solid across regions.”

Graph: Calculated Risk

The median price of existing homes shot up 10 percent in April as well, as housing inventories have declined to 6.6 months. And that is at the current slow sales pace. Should it pick up this year, inventories could decline to their historical low of 4 percent giving a further boost to prices.

Graph: Calculated Risk

This is because total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April.

And we are seeing larger price rises in the FHFA price index of homes with Fannie Mae/Freddie Mac owned mortgages. Home prices climbed 1.8 percent on a seasonally adjusted basis in March, said the Federal Housing Finance Agency. Year-on-year, prices rose 2 percent. For the first quarter as a whole, prices rose 0.6 percent from fourth-quarter levels. "Increased affordability and a somewhat smaller inventory of homes for sale are positively impacting house prices," said Andrew Leventis, FHFA principal economist. The FHFA is a purchase-only index based on transactions bought or guaranteed by Fannie Mae or Freddie Mac, as we said.

Lastly, default rates continue their decline, meaning fewer REO (bank-owned) properties are coming on the market. As far as delinquencies, MBA Chief Economist Jay Brinkmann says we are "halfway back" to normal of around 5 percent historically, though this does not include the "in foreclosure" bucket; loans in foreclosure are still near record highs. We anticipate further declines in both default and foreclosure rates, as HARP 2.0 Fannie/Freddie loan modification activity that ignores negative equity is going through the roof. Some lenders are reporting up to 18 days to initial underwriting of submissions, because of the huge backlog.

The Mortgage Banker Association's National Delinquency Survey (NDS) covers about "42.9 million first-lien mortgages on one- to four-unit residential properties" and is "estimated to cover around 88 percent of the outstanding first-lien mortgages in the market," said the press release. This gives about 5.8 million loans delinquent or in the foreclosure process.

So increased affordability, combined with declining inventories seems to be finally spurring homebuyers to come out of their rentals (or parents’ households) to make that most important of investments—a home of their own.

Harlan Green © 2012