3 lessons learned from the mortgage rate drop

Mortgage rates are back to the highest level in a month, and if news from the U.S. economy stays positive, they could edge ever higher. While the brief drop a few weeks ago, due to concerns over global economic growth, may already seem like a distant memory, we should take a hard look back nonetheless.

In early October, the average rate on the 30-year fixed conforming mortgage ($417,000 or less) fell below that psychologically significant 4 percent level. It's back above that now, but just that inch below was enough to reveal the underbelly of the housing beast.

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1. While the drop itself was not huge, it pushed thousands of potential borrowers off the fence to refinance. Applications to refinance jumped more than 20 percent in just one week, according to the Mortgage Bankers Association. That tells us that there is still a large cohort able to refinance. The common myth was that anyone who could benefit already refinanced over a year ago, when rates were in the lower 3 percent range. The recent rate reductions added 1.4 million borrowers to the "refinanceable" population, according to a new report from Black Knight Financial Services, which estimates that at least 7.4 million 30-year loans could now benefit by refinancing.

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2. The drop in rates did nothing to push potential homebuyers off the fence and into a home. Mortgage applications to purchase a home actually fell along with rates, and then rose this week when rates began climbing higher. A monthly survey of real estate agents by Credit Suisse found, "The recent move lower in rates (that has already partially reversed) did not drive incremental demand, though this could change over time if low rates persist." How can this be? Because homebuying today is not about rates; it's about price and supply. The two are inextricably linked, and both have been moving more dramatically than normal lately. Buyers are either facing sticker shock or not finding what they want.

As the national housing recovery drones on, local market dynamics are changing at a rapid clip. Buyers, sellers, investors and real estate agents need to watch prices and inventory by the moment. That's why we've launched a new tool here on the Realty Check page to help.

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3. Wall Street may have spooked homebuyers falsely. "Wall Street believed that the end of QE3 would send mortgage rates to the 5s (percent range). Those predictions may have pulled demand for housing forward and may partially explain why the recent sub-4-percent rates did little to stoke purchase loan applications," said Dan Green, publisher of themortgagereports.com.

Most think that when rates rise, buyers go away, but there is often a fear surge. Buyers who had been waiting for the right time, suddenly see mortgage rates rising, and worry they'll miss the boat.

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