Thirty-year and 15-year fixed rates – though still historically low -- are about the same as they were a year ago. (Adjustable rate mortgages are between 4-tenths and half a point lower than in March 2007.
Some buyers may already feel like they missed the chance for a bargain.
Mortgage rates fell early this year then rose again and are now higher now than they were in late January, when the Fed slashed the federal funds rate 1.25 percent.
On January 24, a 30-year fixed rate mortgage carried an average rate of 5.69 percent. By Feb 28, the rate was up to 6.24 percent. (A fifteen-year fixed mortgage saw a similar boost, hitting 5.72 percent in late February).
Even though interest rates remain historically low, many consumers expect them to be lower – and that’s created a little sticker shock.
The rate on 30-years flirted with 5.00 percent in June 2003, when the federal funds rate was 1 percent and the Fed was very concerned about the possibility of deflation. The recent high was 6.86 percent in June of 2006, around the peak of the housing boom.
“Rates are a lot higher than they have been and than they should be,” says Cohn.
The Price Is Right
On the positive side, affordability is up.
Sales of existing homes fell 12.8 percent in 2007, while the median price dropped 1.2 percent, to just under 219,000. Homebuilders are slashing prices and offering buyer incentives for new homes.
The National Association of Realtors affordability index – launched in 1982 -- edged up from an average of 106.21 in 2006 to 111.8 in 2007. It is expected to jump to 129 this year.
"That’s a real improvement,” says NAR’s Walter Molony
The index – a broad gauge which factors in median home prices, median family income, and an average effective interest rate based on a bucket of land and points – spiked to more than 130 in January when rates were at their lowest.
O’Connor of the mortgage trade group admits that it has helped in some markets but adds that the affordability equation is “all relative to income.” In the past, he says, “You used to be able to expand your purchasing power” by using less conventional types of loans, higher loan-to- value ratios and smaller down payments, allowing people to enter the market.
“You need a reasonable relationship between income growth and home prices,” says O’Connor.
For many that means higher down payments and/or lower loan-to-value ratios, which prices them out of some markets and properties.
Even those with high incomes and good credit are being forced to put down larger down payments.
Products -- Then And Now
Many of those mortgage products O’Connor is referring to – no documentation, Alt-As, interest only, and of course, subprime -- are no longer available or subject to significantly tighter lending standards.
A year ago or so, says O’Connor, that group accounted for 40 percent of the market. Now it has “effectively evaporated,”
Jo, the Manhattan real estate agent, says she hasn’t dealt with a customer seeking a no-documentation loan all year.
“I had no-docs everywhere last year,” she says. “Now, I think they are scared.”
Plain vanilla is back in fashion.
“If you’re a mortgage shopper today, it makes all the sense in the world to go with the fixed rate loan,” says Mike Larsen, am interest rate and real estate analyst with Weiss Research. “ARMs have their place for savvy borrowers in the right circumstances,”
Jo says more buyers are doing 30-year fixed than before and most are shying away from ARMS. “They’re terrified that rates are going to go sky high. “
The Big Enchilada
In an economy where million dollar homes are no longer palatial estates and are now the stuff of many a suburban street, the jumbo loan – also known as a non-conforming loan – is at the fulcrum of many a local real estate market.
Right now, any loan with a value over $417,000 falls into the jumbo category. Add a down payment of 20 percent or 25-percent -- hardly the norm of old -- and you have house with a value of around $500,000. Seen many of them advertised lately?
That’s the current conundrum for many buyers and sellers. After two decades of price gains, even with the recent slide in prices, many transactions require a jumbo loan.
In California, for example, one third of existing mortgages are a jumbo, according to the NAR. Other high-priced markets have similar ratios.
“In the jumbo space, you almost have to put a lager down payment than before," says O’Connor.
What’s more, the premium has gone up. Jumbo loans are now between 1 percent and 1 ¼ percent higher that conforming ones, says Maloney. Prior to the credit crunch the spread was typically 25--50 basis points, depending on the size, the borrower and the market.
For these reasons and others, the new ceiling for jumbos, backed by Fannie Mae and Freddie Mac, will soon rise to about $729,500. (The exact level will vary from market to market based on the median sales price of metropolitan areas as defined by the Department of Housing and Urban Development.)
That change should provide “a little short in the arm,” says Cohn, many of whose clients are in the relatively high-priced New York City market and its suburbs.
The higher borrowing limit will not only facilitate more transactions but is also expected to shave a quarter percent or more off the price of a loan. On the lender side, it should also improve liquidity, partly because a related legislative measure raised the amount of loan money backed by federal insurance.
Another big part of the impact may be on a less concrete level; industry players hope it will improve confidence about the market.
“A lot of people are looking for stability and trying to time the market,” says Maloney.
Of course, even that may take some time.