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