The Debt Crisis and Mortgage Rates
As we edge ever closer to D-Day (default day, debt ceiling day, however you choose to see next Tuesday, August 2nd), those of us who live and breathe the housing market are trying to figure out what this will mean to mortgage interest rates.
They are currently bouncing around historic lows and have been for some time. Refinances are surging, as the seven people left who haven't yet refied are scrambling to do so.
But are we all worried over nothing?
"The debt crisis is probably the biggest factor hanging over mortgage rates at the moment," says Guy Cecala of Inside Mortgage Finance. "Once investors feel there is any uncertainty about the U.S. government’s ability to guaranty its debt, Treasury rates and mortgage rates will start to rise – probably by at least 25-50 basis points."
That's the clearest answer I've gotten from the many experts we've had discussing this on CNBC today. Most just say, "We can't know." I've been arguing that the debt crisis is not as big a deal as the scheduled drop in the conforming loan limits at Fannie Mae, Freddie Mac and the FHA. Experts say the change from the $729,750 limit in the highest priced markets to $625,000 and the drop back to $417,000 in lower-priced markets will really only affect 5 percent of homes nationally, but the percentage is far higher in certain local markets.
"But some FHA borrowers will be pushed towards the Fannie/Freddie market and higher down payments since the FHA loan limits don’t bottom out at $417k (like the GSE limits do)," reminds Cecala.
While we all worry about what that lowest rate can be and where, the fact is that while the "average rate" on the 30-year fixed is very low, today's buyers are not all eligible, especially as those rates require big down payments and super-clean credit.
"Those people are not qualifying for the super low rates now, and 30 percent of our sales now are to cash buyers, investors and foreigners, anyway," notes Shari Olefson of Fowler, White, Boggs, who argues we're missing the point.
"The bigger issue with those rates, other than housing and the crisis, is going to be the adjustable rate mortgages. If the rates go up, we are absolutely going to be seeing more defaults and more foreclosures as a result of those adjustable rate mortgages."
And that's just what we need, as we are finally now seeing a drop in initial mortgage delinquencies. Given today's rates, most borrowers with expiring ARMs are actually adjusting to lower rates. And let's remember that: Rates are historically low, and even a bump up of 50 or even 75 basis points still puts us at very low rates. That's why, again, we have to look beyond the rate to what the rate effects.
"A downgrade of U.S. government debt would plausibly raise interest rates, and that would communicate to mortgage rates, but more important would be the effect on confidence and our national spirit, which is so conflicted right now," says Robert Shiller of the S&P Case-Shiller home price index. "It is harming our sense of confidence that matters more than the direct effects on interest rates."
Last month 16 percent of home buyers who signed a contract on an existing home bailed out of that contract before closing. The norm is about a 4 percent cancellation rate, according to the National Association of Realtors. A real estate agent in Burbank, California says he's seeing cancellations in the 70 percent range right now. Is it mortgage rates? Mortgage availability? Appraisals? No, he says. It's a complete lack of consumer confidence.