CHICAGO (MarketWatch) — Economists and bankers who follow mortgage rates religiously think that rates don’t have much farther to drop from record lows. They expect that rates can only go up.
But they also know they’ve been wrong before.
“It’s hard to imagine how long-term, 30-year fixed-rate mortgages could go lower than they are right now,” said Frank Nothaft, chief economist of Freddie Mac. “These are the cheapest rates we’ve ever seen.”
Admittedly, he would have said the same thing six months ago.
Mortgage rates and your payment
* Source: Freddie Mac; For 2011 and 1971, figures are for the month of August only, not annual averages.
** Mortgage amount calculated based on national median existing home price with a 20% down payment.
That’s because earlier this year, Nothaft and others weren’t expecting such a weak economy. Concerns about European markets have unsettled the market, too. And in September, the Federal Reserve announced its commitment to sell short-term government securities and buy long-term securities, a plan known as Operation Twist. The Fed also pledged to purchase mortgage-backed securities, with the proceeds of securities that mature. Read more: Fed decides on $400 billion bond swap.
All of the above put downward pressure on mortgage rates.
And while mortgage rates move daily, those rates have been at or near record lows: Rates on the 30-year fixed-rate mortgage averaged 4.01% for the week ending Sept. 29, according to Freddie Mac. That’s the lowest rates have been in the survey’s history, which dates back to 1971. Read more: 30-year mortgage rates just barely above 4%.
“My take on this is that certainly interest rates could push lower. We’ve been surprised numerous times,” said Bob Walters, chief economist of Quicken Loans, an online lender.
However, he says there’s more of a risk of a surprise increase in rates than a surprise decrease. That’s because the Fed’s actions are already priced into the market. And with the economy limping along, it’s hard to imagine things could get much worse.
Low mortgage rates are advantageous for buying a home or refinancing the home loan you already have. But, remember, the big reason they’re so low now is because the economy is in such bad shape — and most of us would likely pick job security over an ultra-low mortgage rate.
Still, some borrowers are charmed by the notion of getting a 30-year fixed-rate mortgage at a rate below 4%. In fact, some are paying points to buy down their rate “to say they had a loan below 4%,” said Stephen M. Calk, chief executive of Chicago Bancorp, a privately held retail mortgage bank.
While getting the lowest mortgage rate possible may give someone bragging rights, Calk advises against people being too greedy. Walters agrees: If you have a mortgage at 5% and you could refinance at 4.25%, waiting for the rate to fall an additional 25 basis points could cost you.
“The alternative is that if you don’t take 4.25%, you’re at 5% for the rest of your life,” Walters said.
Effect on the housing market
While the low mortgage interest rate environment this year hasn’t translated into a boom in home sales, the low rates have had a subtle — and positive — effect on the housing market, Nothaft said.
“Construction is running about the same low pace as last year. Single family home sales are running at the same low pace as last year, and without rates being as low as they are now, the market would be worse,” Nothaft said. “That’s not insignificant because if you turn back the clock and think about 2010, we had an important stimulant to drive home sales. That was the federal income tax credit.”
The credit of up to $8,000 for buyers enticed some people to make a home purchase last year.
“That [sales are] running at about the same clip is a testament to some of the power of the high degree of affordability, and much of that affordability of late is driven by record low fixed-rate mortgage rates,” Nothaft said.
Even so, many think that even rates below 4% would fail to cause home sales to spike dramatically, given consumer confidence that is still marred by high unemployment and worries about a double-dip recession.
“It takes more than low mortgage rates to get off the dime and buy a house,” said Michael Lea, real estate professor at California State University San Diego.
For younger would-be buyers, the low rates aren’t anything to get too excited over — and certainly no reason to buy right now, said Charlie Young, chief executive of ERA Real Estate.
“To a whole generation of buyers, it’s not new,” Young said. “Any 30-year-old says ‘For the past couple years they’ve been this low, and I wasn’t paying attention before that.’”
Then, there are others worried that prices on homes haven’t bottomed out, Nothaft said, adding that there could be a lot of people with good income and savings who will come into the market once they’re confident that their home won’t lose value shortly after the ink is dry on their closing papers.
Of course, all of this assumes a person is able to get a mortgage to begin with. Households need a credit score of at least 700 these days to qualify for a conventional mortgage, up from 650 during the mid-2000s, according to a report from Capital Economics, an economic research consultancy. The tighter lending standards have locked out 13 million households from getting a mortgage, the firm reported.
But Walters said that for those who can do it, this one of the best times to buy. Read more: Now might be the best time ever to buy a home.
Like the stock market, it’s best to buy low and sell high: “The time to buy stock is when everyone hates them. The time to sell is when everyone at the barbecue is talking about them,” he said.