Mortgage Rates Slide, But Not Enough to Spur Buying

Mortgage rates are continuing to slide, sparking increased interest in home buying and even more in refinancing, but the spike may prove weak as the economy continues to stumble.

Also, more people will find they do not qualify under today's tougher lending standards.

The crisis on Wall Street is fueling worries about the broader economy—especially jobs—so Americans aren't in the mood for big purchases like a house.

AP

“Even though it costs less to have a mortgage you have to make damn sure that you are still going to have a job in six months before you go out an buy a house,” said Michael Larson, Real Estate Analyst for Money and Markets newsletter.

Another factor: home prices are still falling and are expected to continue declining well into next year, so there's plenty of reason for people to wait.

“Even though we seeing lower rates, the outlook for house prices is that they are likely to deteriorate for the next 12-18 months,” Larson said.

Thirty-year fixed mortgages rates dropped 0.28 of a point this week to 5.73 percent as the government takeover of mortgage giants Freddie Mac and Fannie Mac eased worried about the availability of money for home loans.

The average rates on 5/1 adjustable-rate mortgages (ARM) slipped 0.06 point, to 5.56 percent on Wednesday, according to Bankrate.

The Mortgage Bankers Association reported Wednesday that their Refinance Index jumped 88 percent this over last week, but this is from a low base, does not sift out multiple applications and counts applications, not approvals.

"Remember these are just applications, it doesn't mean they get approved, and many people are going to find out they don't quality," said Larson.

Even before the Fannie/Freddie takeover, mortgage rates were dropping due to a weakening economy and easing fears of inflation.

From a high this year of 6.58 percent on 30-year fixed mortgage—reached in early August— rates are off about one percentage point, with half of that coming from the governments’ recent move, and the balance from weaker economy.

But since Tuesday mortgages jumped back up a quarter percentage point, noted Larson, probably reflecting higher inter-bank lending rates.

Wall Street’s recent turmoil is aggravating those concerns, Jane Fairweather, a real estate agent in Bethesda, MD told CNBC’ Diana Olick.

“People are worried about their jobs and what’s in the pipeline, how many people are going to be affected,” Fairweather said. 

Home prices in her area, high compared to the national median, have come down about 12% since the lackluster spring season, but the lower mortgage rates are still not making them buy more. The “Wall Street debacle just frightens people that much more.”

See below how the surprising jump in August unemployment couldn't have come at a worse time for the already struggling housing market.

Holden Lewis, of Bankrate, says the recent drop in mortgage rates would have stimulated more market activity, if it were not depressed home equity values.

“This is the big stumbling block for a lot of a people – either they owe more than the house is worth and they can’t refinance, or they got a loan without mortgage insurance.”

Without protection against falling equity values, many home owners now own less than 20 percent of the equity in their homes, which requires getting mortgage insurance.

But the cost of mortgage insurance “would cancel out the savings from the lower mortgage rate,” he notes, adding that the market for home equity or piggy-back loans has virtually dried up.

Those that can afford to refinance have probably already done so, when rates dipped below 6% in May or January.

Still the Mortgage Bankers Association Refinancing Index rose 15.4 percent in the week ending September 5.

Still, Larson says now is the time to “at least get on the phone with your lender and find out what the costs are because those costs have gone done.”

At the same time he does not expect much of spike in the housing market activity until rates, which are roughly in line with the average over the last six years, drop even more. 

”If we get 30 year fixed mortgages rates down to the low fives then you are talking about a much bigger refinance wave and much cheaper home financing, but it’s an open question whether we will get there,” said Larson.

Mortgage rates could come down in two main ways. In the short-term the government could push down yields on mortgage-backed securities by buying more, an action Washington said it would reserve for itself when it announced the Fannie and Freddie takeover decision.

The other way mortgage rates could decline is if the economy weakens but then fewer people will be in a position to buy.

“We would need to see more horsepower out of this move or an even bigger decline…for   people with fixed mortgages to get much out of the bargain  - and that could happen if the economic really slumps, ” said Larson.

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