Home loan rates fell for the seventh straight week, but very few borrowers are taking the opportunity to buy or refinance. Supply is in the air and it is driving prices down, but buyers remain scarce.
According to a recent Freddie Mac survey, the average rate for a 30-year fixed-rate mortgage (FRM) in the U.S. Western region declined to 4.50% this week from 4.54% last week. Western rates for the 15-year FRM also dropped – 3.71 to 3.68%. [For more information on the Freddie Mac survey, see Weekly Primary Mortgage Market Survey (PMMS).]
Yet mortgage and refinance applications are not flowing in as fervently as they did when the rates were this low last fall. Refinance application volume was more than 20% higher the last time rates were at this level. However, refinance volume dropped 5.7% the last week of May, according to the Mortgage Bankers Association (MBA). Mortgage application volume also dropped 4% in the same week. [For more information on the MBA’s weekly mortgage application survey, see Mortgage Applications Decrease in Latest MBA Weekly Survey.]
first tuesday take: Interest rates are at an historic low, which as a matter of financial gravity is designed to encourage the public to borrow, or in the case of the homebuyer or homeowner, finance or refinance a single family residence (SFR). But buyers have been backing off as fast as the rates have been dropping. Why aren’t qualified buyers – and we have droves of them – stepping up and getting in on the best rates they will likely see for a decade? (Although they could logically go to 4% as they did following World War II.)
Rarely do we ever have the concurrent dropping of both prices and interest rates for so long a period of time. Typically, the lowering of interest rates over six months would draw in SFR buyers and refinancing owners, and in turn drive up the price and sales volume of those SFRs being bought and refinanced. So what irregularity is causing the public to reject the two most favorable factors for buying?
The answer is displayed in the wisdom of the 10-year bond market activity, the minds of those investors looking at the economy for the next several years and betting it will get better, worse, or not change at all. Treasury bill (T-bill) rates have been in a general decline since February 2011, an indicator that business conditions – real estate businesses of all types included – will not be getting better in the foreseeable future.
And why is this? This condition is partially the result of international financial turmoil and a run to the best safe harbor in the world today, U.S. government T-bills. Investors perceive the demand for money by all takers is not going to increase much during the next few years, including mortgage borrowers. Dear readers, they are forecasting a very slow real estate market for years to come. [For more information on how market rates forecast real estate, see the first tuesday chart, Current Market Rates.]
What bond investors see is a lack of confidence in the American public about their personal conditions, including their:
- standard of living;
- over-indebtedness (thus requiring a deleveraging and savings regime);
- dismay about dismal job conditions (mostly for those among us who are unskilled for the job opportunities that are in abundance due to the restructuring of the labor force underway);
- total confusion about the future of the real estate market’s pricing due to massive quantities of negative equities and the need for them to be foreclosed and purged; and
- inability to sell their home and move to a rental or out of the area.
The fact that they have a job and that mortgage rates and SFR prices are low mean nothing in the shadow of the current American mental rigor mortis that has been installed and anchored by questions of fear and doubt: Are we safe from the financial crisis? When will we recover from the recession? What are we doing about the oil crisis? How do we deal with the gold maniacs? Are our banks going to be here tomorrow?
The public is not confident about taking action in what they perceive as an unstable, crisis-ridden battle scene. Until the average homebuyer is steadily employed, has stashed more cash in his pocket and possesses enough assurance about the economy, there will be a general public reluctance to dive back into the housing game. Americans – and the emerging Generation Y (Gen Y) even more so – are hesitant to dip a toe into the uncertain waters of real estate as they are not accustomed to fending for themselves in this arena. The question is, who can they rely on?
Agents have to demonstrate that they have the skills, training and capability to guide a prospective buyer and give counsel. Over time, this will produce prudent buyers who understand they can – and should – make an offer. The agent also needs to act and to restore public confidence by disclosing more about the property in question than the seller knows, then back it up with reports, worksheets, property profiles and neighborhood data readily (or not so readily) available by making a call or two. [For more information on the agent’s duty to counsel homeownership, see the May 2011 first tuesday article, Financially illiterate homebuyers in distress – agents to the rescue!; see first tuesday Form 320-2]
The demand for a home has not disappeared. It’s just on standby, until agents figure out how to sell the idea of homeownership in this new paradigm we suddenly see all around us.
RE: “Home loan rates fall, but so does mortgage demand” from the LA Times
Perhaps, seeing the amount of fraud that has purveyed the current market, homebuyers are afraid of the lenders.
“Be Fearful When Others Are Greedy And Greedy When Others Are Fearful” – Warren Buffett
Shrewd investors buy when others are too afraid to do so, that’s when you find good deals. Home prices are going down because banks are getting rid of their REO’s and they are taking a beating on them. When renters realize it is cheaper to buy than rent, a lot of inventory gets sucked up. It happens too fast to realize you missed the bottom. Keep in mind the cost of construction is going, and many homes are selling almost less than half of replacement cost. There has never been a better time than now to buy real estate.
The problem is too much information. Everyone reads reports and comes up with an opinion and a , prediction. Reading stats and trends are good, but so many people are over analyzing everything. The truth is, nobody knows for sure when the so called bottom will come but everyone who looks at so called trends, look, analyze, comment, and hesitate, thinking that they can predict the future of the market and wait it out, coming out with what they WANT. .
The fact is, they will probably miss the boat every time and rent from someone who doesn’t put full trust in trends and realizes that someone buys a house every day.
A teacher of mine said something I will never forget. He Said “Everyone buys a house either for themselves or for someone else, but a home belongs to the person on the deed. You either end up with a house or a home, with a deed,……….. or a rent receipt.
We can probably guess which one putting too much trust in trends and predictions will get for us, if we really look at the sales that still happen even in the midst of the downturn. I can’t put trends aside altogether. Its true, figures don’t lie, but as we have seen in the past few years sometimes liars figure and we have seen and are continuing to see the results.” Really, the bottom of the market is different things to different people.
Someone buys a house everyday and someone pays off their mortgage everyday. These people got there most of the time, not as an investor using investment mortgage techniques while looking at, analyzing, and acting on trends, but as a family looking for a home after saving and educating themselves on the process without over analyzing what may or may not happen. It’s true but sometimes I think we ignore this too often.
Why in the heck would I (or anyone) buy a home now even if the rates on mortgages are good? The home inventory is continuing to grow and will continue to grow in the foreseeable future, prices are dropping and will continue drop in the foreseeable future.
Can anyone predict the bottom? No, but we’re not there yet and for me, someone who was not really able to afford the type and size home I wanted for myself when the market was in boom mode, I’m just going to sit here and wait. When the prices get near the bottom in the next 2, 3 4 years and I can get the absolute biggest bang for my buck, I’m in.
Oh, and I’m buying one to live in for many years, probably 15-20 years until I retire, not as an investor or flipper.