With mortgage rates sliding for a fifth straight week, the possibility of locking in a rate below 4 percent is tempting for consumers and could unleash a wave of refinancing. It may even convince some Americans to buy their first home.
Yet there are limits to how far the wave can extend. Millions of homeowners already re-financed in 2013, when the average 30-year mortgage rate stayed below 4 percent until mid-year. And the overall housing market remains hampered by tight mortgage credit, rising home prices and stagnating incomes.
This week the average rate on the 30-year loan fell to 3.92 percent, mortgage company Freddie Mac reported Thursday. The average for a 15-year mortgage, a popular choice for people who are refinancing, retreated to 3.08 percent from 3.18 percent.
That is sparking a boomlet of homeowners looking to refinance as long-term mortgage rates plummet. Homeowners eager for a bargain rate are firing off inquiries to lenders. Applications for "refi's" jumped 23 percent in the week ended Oct. 17 from the week before — reaching their highest level since November 2013, figures compiled by the Mortgage Bankers Association show.
The average 30-year mortgage rate nationwide that week breached the 4-percent threshold and hit 3.97 percent from 4.12 percent the previous week. It was the lowest level since June 2013. Deepening concern over the health of the world economy compelled investors to flee stocks and move into bonds. That pushed up prices of Treasury notes and suppressed their yields, which often pull along mortgage rates.
But it remains to be seen whether the uptick in refinancing will turn into an extended boom.
About half of all homes with a mortgage have rates at about 4.3 percent or less, according to real estate data provider CoreLogic. It may not be worth it for those homeowners to refinance at current rates because refinancing carries its own costs and fees.
Nela Richardson, chief economist at real estate brokerage Redfin, estimates that only homeowners with rates higher than 4.25 percent would see a net benefit from refinancing.
Similarly, with many home borrowers already in the range of 3.5 percent to 4 percent on their mortgages, the spike in refinancing may not last very long, said Michael Fratantoni, the MBA's chief economist.
For potential homebuyers, the lower rates could encourage reluctant purchasers to take the plunge.
Their hesitation stems from the lingering effects of the Great Recession. Median household incomes have yet to completely rebound and remain below their 2007 levels after adjusting for inflation. Limited income gains have cut into the cash flow and down payment savings needed to purchase a home. Meanwhile, median home prices have risen 5.6 percent over the past 12 months to $209,700, and lenders have kept standards tight for making mortgage loans since the recession.
Add to that the trend toward millennials putting off buying their first home, said Stan Humphries, chief economist of real estate firm Zillow.
Economists expect sales of new homes in September to show a 7.1 percent drop from a year earlier when the Commerce Department issues a report Friday.
"A lot of buyers who are still on the sidelines are going to be encouraged by this," Richardson said of the falling mortgage rates.
But MBA's Fratantoni stressed that home buying will largely be driven by what happens on the employment front.
U.S. businesses have been hiring workers at a healthy pace, pushing down the unemployment rate to a six-year low of 5.9 percent. More hiring means more income for consumers to spend on buying homes, as well as a stronger economy overall.
Still, the job market is far from full health. More than 7 million people hold part-time jobs but would like full-time work, up from 4.6 million before the downturn. And there are still twice as many people unemployed for longer than six months as there were before the recession.
Before last week, many bankers, lenders and borrowers had assumed that mortgage rates would soon start rising closer to a two-decade average of 6 percent. That was based on expectations that the Federal Reserve would start raising its key short-term rate next year — a move that likely would lead to higher mortgage rates.
But that assumption fell suddenly into doubt as stocks plunged last Monday and Wednesday amid fears about global economic weaknesses, the spread of Ebola and the threat of the Islamic State militia group in the Middle East.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country between Monday and Wednesday each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.
The average fee for a 30-year mortgage was unchanged from last week at 0.5 point. The fee for a 15-year mortgage also remained at 0.5 point.
The average rate on a five-year adjustable-rate mortgage slipped to 2.91 percent from 2.92 percent. The fee was steady at 0.5 point.
For a one-year ARM, the average rate rose to 2.41 percent from 2.38 percent. The fee held at 0.4 point.
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