Traditionally the Fed raises and lowers the national interest rate in an attempt to spur or slow down the housing market economy. It is apparent that the old rules do not apply to the current struggling housing sector. Rates have continued to drop to 30 year record lows, but the response the feds were looking for is nowhere near what the past has predicted.
History has shown that when the national interest rate dips below 5% there is a noticeable spike in purchase applications and requests to refinance. In 2003 the National Association of Mortgage Brokers Association reported that when new home mortgage rates slipped below 5% there was an all time rush for refinances totaling more than 10,000. Since that time there has been a noticeable decline in refinance requests when the rate falls below the 5% benchmark. When the interest rate fell below 5% in May of this year, the request for refinances totaled 3,500.
The power of the interest rate may be losing its grip on the market. Many economists believe that the sluggish response is a bi-product of the loan modification era that we are currently in. As the bottom fell out of the economy many borrowers acted hastily in efforts to refinance or modify their loans to save their homes. The pool of borrowers wanting to refinance has been reduced through this rush. Before many of these recently refinanced or modified borrowers re-enter the refinance pool the interest rate is going to have to fall even further, below 5% to make it financially justified. Some within the industry believe the new benchmark will be 4.5%.
Borrowers seeking an even lower interest rate will notice that the market has changed since the last time that they were at the lending table. Banks and lending institutions have had to increase many of their origination fees and lending standards; including upfront fees and minimum credit allowances. The decision for many borrowers wanting a reduced interest rate now must include all the new rules and regulations and the upfront financial requirements. For many borrowers the feasibility of meeting these standards is not there yet. Maybe when the rate hits 4.5%?
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Unfortunately, I don’t think record-low rates will be enough. Buyers are already entice with low rates, high inventories and the resulting low prices. Those who wait may save a few grand more on the price (if at all), but will pay more for its financing.
Mortgage rates at 4.5% won’t do the trick. Some claim that it is heading to 4.25%… and yet the public does not feel secure enough to go out and buy a home. This is a bad harbinger for us all. People generally want to re-finance, but they are being turned down because of the unreasonably strict requirements. If you don’t have 20% equity, low debt ratios, among others, there’s no way you’re going to get a loan.
It’s amazing how people are used to the low interest rates! It’s not news to them at all.
I just showed one of my buyers the historical mortgage rates. They couldn’t believe it! In the 80s the rates were over 10%? And people were still buying?
People are nervous even with the incentives. I think this downturn has affected people to where they are much more cautious about their purchases especially large ones like buying a home. The future is still uncertain and so goes the spending.
If you ask me, it was getting away from the 20-percent downpayment requirement that led to the problems we face today. A lot of people may have to endure a prolonged period of pain before the situation improved. By “long”, I mean 5 to 7 years.