Published: Wednesday, June 16, 2010
By Frank Szivos
Mortgage interest rates are holding steady at record lows, creating an ideal scenario for home buyers, in particular first-time ones.Jerry Vigorito, senior vice president Atlantic National Mortgage in Westport, sees several influences holding mortgage rates down and setting the backdrop to spur the slumping housing industry.“First-time home buyers are fueling the housing market,” Vigorito said. “There’s no pressure for interest rates to rise and those first timers can take advantage of it to jump into the market.”At the moment, first-time home buyers are sitting in the driver’s seat. Not only can they take advantage of the 30-year fixed rate holding steady at about 4.75 percent but also enjoy a federal tax credit of $8,500. On top of those advantages, throw in low housing prices and the first-time buyers can get into more house than they might have dreamed of.However, the Federal tax credit dries up at the end of this month which could sidetrack housing market sales. The jury is still out on what will happen. Adjustable mortgages are also holding, dipping under the 4 percent range for three, five and seven year terms.But the Mortgage Bankers Association, a national organization representing the real estate and finance industries, reported that the flurry of mortgage applications is slowing because of the end of the Federal tax credit program. The MBA report showed a decrease of 12.2 percent in mortgage applications at the beginning of June.Edward Deak, professor of Economics at Fairfield University, notes that several strong influences continue to bog down the housing market and are likely to continue for the time being.•More stringent loan underwriting rules – Because of the downturn in the economy and rise in foreclosures, lenders are following stricter loan guidelines.•Foreclosures and distressed properties continue to increase — Banks are also expected to put more foreclosed properties onto the market in the months ahead.•Lack of confidence in the economy. The unemployment rate continues to hover around 10 percent nationally. As a result, people are reluctant to make a major commitment, such as purchasing a home.Even though the housing industry struggles to gain traction, it should come as little surprise based on the magnitude of the global recession that settled in last year, Deak said. This downturn has proven to be one of the worst since the Great Depression.Putting the Federal tax credit impact aside, Vigorito has seen an easing of the stringent credit guidelines that should help all home buyers. “I’ve seen credit checks ease a bit,” Vigorito said. “It’s still drastically different than it used to be. A lot of products are no longer available. But the low interest rates are helping everyone.”Vigorito points out that many existing home owners are taking advantage of low fixed rates by refinancing, which has sparked the mortgage industry.John Gerlach, professor of Finance at Sacred Heart University, speculates that the prolonged low interest rates could inspire more buyers to invest in the housing market. This trend could go a long way to shoring up the sagging housing industry.“The prices of homes have come down enough that people will start to buy them as investments,” Gerlach said. “If I had to pick a highly valued investment market over the next three years it would be residential housing. This could slowly turn the market around.”Vigorito is optimistic about an uptick in the housing market, but is aware of speculation that the possibility of creeping inflation could yank the rug from under the resurging mortgage industry.Some economic critics fear that government spending could ignite inflation down the road. Historically, rising inflation, in turn, sparks a rise in interest rates.“There could be some winds of change in the future,” Vigorito said. “I’ve read that current fiscal policy spending could result in inflation which is usually poison to interest rates. Remember how interest rates climbed back in the [President] Carter years when inflation ran high.”Anthony Macari, professor of Finance and head of the MBA Program at Sacred Heart University, sees interest rates holding steady for the foreseeable future, primarily because the economy is growing at such a slow rate.“The underlying slowness of economic recovery should offset inflation,” Macari explained. “I believe mortgage rates will hold steady for now. Any threat of inflation is probably a longer term issue, maybe two to five years out.”Diane Nelson, president of Independent Mortgage in Fairfield, views the mortgage scenario as stable for now. As long as the economy grows slowly, mortgages should hold steady, according to her.“There’s no reason to raise rates,” Nelson said. “When you see things start to heat up and there are signs of a major recovery, there’s just no impetus to touch mortgage rates. When the economy is in gear that’s when you see rates go up to keep thing under control. At least that’s the theory. But I’m not a prognosticator or an economist, just a mortgage guy. It’s my view from the bottom.”
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Mortgage rates continued to tick higher yesterday as benchmark Treasury yields rose and prices of mortgage backed securities fell for the sixth consecutive session. Most of the losses occurred early in the day, so price weakness was already accounted for on lender rate sheets when theywere issued.
The only market moving event that took place yesterday was the auction of $44 billion 2 year Treasury notes. Demand was slightly above the yearly average but much lower than the previous 3 auctions. Demand from foreign investors, known as the indirect bid, was much less than normal. For a recap of the results, check out AQ’s commentary.
Today at 1pm, the Treasury will auction $42 billion 5 year notes. If demand is strong, we could see an improvement in mortgage rates. Matt and AQ will cover the auction results on the MBS Commentary once it is complete.
The S&P/Case Shiller Home Price Index was released this morning. This report tracks the monthly changes in the value of residential real estate in 20 metropolitan regions across the United States. Since our economy is driven by consumer spending, falling or rising home equity (values) affects the psyche of consumers. During periods of declining home values, consumers are much more likely to save money and pay off debt as they watch the value of their largest investment depreciate. Rising home values encourage new construction, remodeling, etc… which increases consumer spending. Many economists believe that until home prices start to move higher, our economy will have a difficult time growing. This makes tracking home sales data much more important now than in previous years.
The final report of the day was a survey on the mindset of consumers...Consumer Confidence. An optimistic consumer is much more likely to spend money while a pessimistic consumer is more likely to save. Economists surveyed for this month’s report expected a read of 52.5. The report came in at 52.9; consumers were more optimistic than anticipated in December. Yay! The market had no immediate reaction to the news.
Reports from fellow mortgage professionals indicate mortgage rates to be similar to yesterday’s. The par 30 year conventional rate mortgage remains in the 5.00% to 5.25% range for well qualified consumers. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. If you are seeking a 15 year term, you should expect a par rate of 4.375% to 4.50% with similar costs.
There are currently two thoughts regarding the recent move higher with mortgage rates. One side is saying that this is the start of higher mortgage rates which will continue into next year as the economy continues to improve. The other side of the argument is the recent move higher isn’t an indication of a trend for rates next year but rather due to very low volume of activity due to market participants being on vacation over the last two weeks of the year. What is your opinion? Do you feel the move higher in rates will continue into next year and the days of rates under 5% are over? Or do you feel once the first team traders come back to work from their Christmas vacations that much of the losses we have suffered will be recaptured and rates will once again move below 5.00%?
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Stephen L. Smith, President of A.C.L. Mortgage Services, L.L.C.
Email address: steve@acl-mortgage.com
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