Euro troubles send mortgage rates to record lowsby Keith Gumbinger
A resurgence of troubles in the Eurozone has driven mortgage rates to fresh “all time” lows. Investors continue to sell holdings of equities and stuffing those proceeds into Treasuries, cash and other safe haven investments, keeping downward pressure on rates. The Fed of course is also continuing to run Operation Twist, which also helps long-term rates to remain low.
Economically, the latest data presented a mixed bag of news, offering little clarity or suggestion of direction. Meanwhile, fantastically-low rates are at least causing some interest among potential homebuyers.
Mortgage rates still falling
HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbos) eased by another seven basis points (0.07 percent) for the week ending May 18, and at 4.05 percent, now stands at another new record low.
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The FRMI’s 15-year companion shed five basis points (0.05 percent), slipping to a new record low of 3.30 percent.
Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages fell by another two basis points to 3.75 percent, while the overall average rate for 5/1 Hybrid ARMs was down by two basis points (0.02 percent), finishing at 2.92 percent for the survey period.
Will the Fed step in (again)?
If the economy should falter, expectations are that the Fed will come to do more, either extending or expanding its supports for the economy. However, with just a handful of weeks to go, it’s not clear that the Fed has made any decision what to do just yet.
To the extent that the Fed’s present program has supported the economy, its expiry might tend to slow growth somewhat; that said, an extension or even a new program might have limited effect, with low rates and plenty of cash already circulating in the economy.
It seems unlikely that the Fed will start new programs when Operation Twist expires, but we still think a logical course of action will be to extend the program, perhaps until year’s end.
Home builder optimism has long way to go
Housing starts bounced higher in April, landing close to its recent four-year high. Construction on some 717,000 new homes was started during the month, with both single- and multi-family recovering from a softer March.
After a dip in March, optimism among builders moved higher again, with the group’s indicator landing at 29, its highest level since 2007. The five point jump for the month was goosed by sales of single-family homes, a return of traffic to showrooms and improved optimism about the next six month period. With record low mortgage rates in place, thin inventories and strong affordability, builders have more to be optimistic about, even if their indicator remains well below the break-even mark value of 50.
Expect low mortgage rates for some time
For the most part, the economic math is pretty simple to understand: Weak economy plus cloudy outlook plus soft inflation plus Euro-woes equals record low interest rates.
With just a little additional upward momentum in the economy, we could very well find ourselves in a sweet spot for potential homebuyers and sellers. When will that come? It’s hard to say.
To start with, we’ll need to see unemployment moving downward and employment moving upward. Rents would need to continue to increase, making homeownership more compelling despite risks of value loss. And, yes, amid those conditions, mortgage rates would tend to be higher, but even if we moved considerably higher from here, rising 50, 75, even 100 basis points over a period of time, mortgage rates would still rank among the best of a generation or more, even if not at rock-bottom lows.
It will likely be a grind to get there, regardless. In the meanwhile, we will see if low rates in April had any effect on homebuying patterns as reports for both new- and existing-home sales are due out. Otherwise, a fairly light economic calendar will no doubt let markets continue to focus on Greece, Italy, Spain and other European economies and political systems. There’s nothing to suggest any imminent increase in mortgage rates, but we think the fall may halt.
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