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What’s Up With The Low Rates?
Question: In late August mortgage rates fell to not much more than 4 percent. If we’re in a recovery, then how come mortgage rates are not higher?
Answer: Mortgage rates are something of a financial wild card. While one can think of ways to link rates with home sales, economic recoveries and Federal Reserve policies, it’s probably best to suggest that the rate you pay for real estate financing is largely a by-product of supply and demand – and that right now demand is weak and supply is overwhelming.
There are several reasons to explain low rates.
First, because so many people have recently refinanced there’s little demand for replacement loans. “Refinance mortgage originations,” Freddie Mac said in August, “were down about 60 percent from 2013 to 2014, and we expect them to decline about another 50 percent from 2014 to 2015.” In short, many people today have 3-percent financing, so why would they want to trade in such a loan for a 4-percent mortgage?
Second, real estate demand is down. According to the National Association of Realtors, existing home sales for July were 4.3 percent lower when compared with a year earlier.
Third, cash sales continue to be a big part of the marketplace – and with cash sales you don’t need mortgages. According to RealtyTrac, cash sales represented 38 percent of all second-quarter home sales.
Fourth, loan demand is down at the same time the marketplace is flooded with money. UBS Chief Economist Maury Harris estimates that $2 trillion in excess cash is now held by lenders.
Fifth, given the worldwide political climate it’s hard to imagine that more cash will not pour into the United States because our economy is seen as simply more secure then any number of overseas alternatives.
On the other side of the equation: Many investors – the people who supply home-loan money – would prefer to not originate fixed-rate mortgages today. The reason is that they do not want to get locked-in at today’s rates, fearing that interest levels might rise in the future. For such lenders, adjustable-rate mortgages are a more attractive choice, a form of financing where rates can increase with the times. EllieMae reports that in July 7.2 percent of all loan originations were ARMs versus 5.2 percent in 2013.
In real estate you want to see both low rates and a broad economic recovery. Low rates make homes more affordable and are a hedge against higher mortgage costs, while an economic recovery means more people will feel good about local markets and hopefully will want to buy as a result.
So far in 2014 rates are low but the economic recovery is hardly solid, something you can see by looking at home price trends: NAR says that in the second quarter home values rose in 122 metro areas – and fell in 47.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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