Mortgage Rates Drop As Stock Prices Plummet
May 07th, 2010Positive economic news at home and negative news abroad impacts mortgage rates and home sales. Using past events to predict future events is tricky but history tells us this economic data predicts stable rates cannot hold for too much longer. If you have been using the refinance calculator to determine if you will benefit from a refinance mortgage, keep reading to see how market events may impact your decision, not only if to refinance but when.
Mortgage Rates
The common consensus was that when the Federal Reserve stopped buying mortgages after March 31st that mortgage rates would climb as a result. Common consensus did not take into account a European country (Greece) having a financial meltdown driving investment dollars to U.S. bonds, and mortgages. Since the Fed stopped its purchase program mortgage rates have not gone up, but in fact have gone down.
The Mortgage Bankers Association Weekly Mortgage Applications Survey reported for the week ending last Friday April 30th that the average 30 year fixed rate mortgage at 80% loan to value was 5.02%, down from the prior week. Next week’s survey will most likely show the rate dip below 5% as the U.S. stock market crash and rebound on Thursday saw investors pull money out of stocks and invest in bonds, and mortgages. Thursday’s wild ride showed that the U.S. is still where investors go when there is trouble abroad.
Purchase Mortgage Applications Soar
Also in the MBA Weekly Survey was data on mortgage applications. For the third week in a row purchase applications climbed by double digits, driving the increase in purchase applications was the expiration of the IRS home buyers tax credit on Friday; April 30th was the deadline to be under contract to purchase a home.
Government mortgage applications (FHA and VA) continued to increase, up 16.7% from the prior week, and refinance applications continued to decline as a percentage of total applications. Refinance applications were only 52% of the total application volume. As purchase mortgages increase lenders have removed pricing incentives previously offered for purchase mortgage applications.
Supporting the surge in purchase applications is news from the National Association of Realtors that existing home sales in March rose 5.3% for back to back monthly increase in home sales.
Pre-Qualification Calculators Getting Busy
Information on workers points to more strength in the future for housing markets. In its survey of businesses the payroll company ADP announced that the private sector added 32,000 jobs in April and the number of lay off announcements in April hit a four year low. While initial unemployment claims continue to be very high, 444,000 for the week, this number has been slowly decreasing over the past several weeks.
For April personal income was up 0.3% from March and 3% from April 2009. The increase in personal income reflects employers paying more overtime to workers, the next step is to reduce overtime payments and hire more workers. April saw an increase in personal spending of 0.6% from March and up 4.5% higher than April 2009. Spending increases surpassing earnings income is good news bad news for the economy. We have seen Americans increasing their personal savings throughout the recession, if there is a turn from savings to spending for the American consumer it will have a positive impact on the economy. If the spending increase outpaces personal income for several months it could create another area of pressure on inflation—which is bad for mortgage rates.
With jobs slowly being added to the economy and personal income increasing there are more Americans who will qualify to purchase homes. Even with the absence of the tax credit the lure of home ownership with low housing prices and historically low mortgage rates is very strong. With growing income more families will qualify for purchase mortgages.
Timing Mortgage Rates
While mortgage rates have benefited from the financial chaos in Greece, at some point that chaos will be resolved. In using one of the free mortgage calculators to estimate costs and payments I would use an interest rate of 5% and cost of 1 point origination fee if you are acting in the next few days; if you feel your mortgage transaction may be later in May run your calculations using a mortgage rate of 5.125% at the same cost, 1 point origination fee. Rates have dropped this current week on the Greek economic chaos; when that situation resolves itself one way or another expect investors to re-invest in the stock market and pull investments out of bonds and mortgages, causing rates to rise.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.
Tags: home purchases , home applications .
