Current Mortgage Rates Driving Housing Market's New Stability?

Posted by  on Oct 08, 2010

Lowest Mortgage Rates Behind Stability?

In the press release that accompanied its latest housing forecast, published April 19, 2010, Fannie Mae says that housing is stabilizing. And it goes on to provide a long list of factors (inventory, employment, consumer spending...) that contribute to the housing market's fortunes.

However, it doesn't mention the importance of current mortgage rates, which remain among the lowest in history. And that seems odd, because some believe that those rates are a key element in the recovery, and that any significant upward movement in them could easily set it back.

Best Mortgage Rates to Linger?

Both Fannie Mae's April Housing Forecast and the Mortgage Bankers Association's (MBA's) latest Mortgage Finance Forecast predict that mortgage interest rates will rise much more slowly than many experts were expecting up until quite recently.

The MBA says that it thinks that the average interest rate for a 30-year, fixed-rate mortgage will edge up only slowly, reaching 5.8% in the last quarter of this year, 6.3% by the same time in 2011, and 6.6% by the fourth quarter of 2012. During week ending April 9, 2010, it was 5.17. However, it would be a mistake to be lulled into a false sense of security by those gentle increases.

What Lowest Mortgage Rates Mean to You

According to MBA figures and the ShopRate mortgage calculator, if you bought an existing home at this quarter's national median price ($173,100), and paid that latest actual mortgage rate (5.17 percent), your monthly repayments would be $947.31, and your total repayments over the 30-year life of the mortgage would be $341,030.

But, according to the same sources, if you were to wait until the last quarter of 2012, you'd pay more for your home (median price for existing homes forecast to be $183,000 then), and a higher rate, 6.6%. That double-whammy would mean that your monthly repayments would be more than $220 higher ($1,168.75), and the lifetime cost of your mortgage very nearly $80,000 more ($420,748).

Home Refinance Set to Decline?

The two forecasts also say that the share of home refinances among mortgage applications will decline dramatically. Fannie Mae reports that, in the first quarter of 2009, 77% of all mortgage originations were refinancings. By the first quarter of this year, that figure had dropped to 65%. Next quarter (Q3/2010), it's expected to be 35%.

It seems likely that there are three drivers behind this change in share:

  1. There will be a lot more mortgage originations for purchases in the future, making the proportion of refinancings smaller.
  2. Most people who could be ready, able, and willing to refinance have done so already.
  3. Mortgage interest rate rises affect people's desire to refinance more than their desire to buy a home.

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