Borrowers and buyers awoke to a new normal in housing affordability last week, as mortgage rates dropped to the lowest level in more than a year and are now expected to stay low for a while.
Mortgage applications jumped 8.9 percent last week from the previous week and 5.7 percent from a year earlier, according to the Mortgage Bankers Association's seasonally adjusted report.
Both refinance and purchase applications surged, but the more rate-sensitive refis were the real leader. Those applications jumped 12 percent for the week and were 8.5 percent higher than a year ago. For much of last year, the refinance market was minimal, down dramatically from 2017, as rates rose.
Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) decreased to 4.45 percent from 4.55 percent, with points decreasing to 0.39 from 0.42 (including the origination fee) for loans with a 20 percent down payment.
That was a reaction to the Federal Reserve announcement that it does not expect to raise rates anymore this year. Some are now suggesting the central bank could even lower rates. Bond yields fell even further on concerns of slowing economic growth overseas. Mortgage rates loosely follow the yield on the 10-year Treasury note.
"Rates dropped across all loan types, and the 30-year fixed-rate mortgage is now more than 70 basis points below last November's peak," said Joel Kan, an MBA economist. "The average loan size increased once again to new highs for both purchase and refinance loans, as borrowers with — or seeking — larger loans tend to be more reactive to the drop in rates."
Homebuyers also reacted positively, with purchase applications surging 6 percent for the week, although just 4 percent higher annually. Consumers shopping for homes are still facing higher prices, but the gains are shrinking and have been for the past 10 months. Nationally, prices were up 4.3 percent annually, according to the latest S&P CoreLogic Case-Shiller home price index.
Some see the decline in prices as a potential boost to the spring housing market, while others see just the opposite.
"The housing market is cooling and appears to be in the early stages of a mild cyclical downturn, as evidenced by declining home sales (despite the last reported month's resurgence)," wrote Issi Romem, chief economist at Trulia. "Changes in home prices tend to lag home sales by a year or two, so the current slowing of housing price appreciation aligns well with already-decreasing home sales."
There is also concern that today's lower mortgage rates could reignite some of the heat under home prices, as buyers are now more financially competitive than they were last fall. There is more supply of homes for sale now, but not a lot, especially at the entry level. Single family housing starts in February were more than 10 percent lower annually, although builders are reporting more buyer demand.
Mortgage rates continued to slide this week, and some are now predicting rates could soon be in the high 3 percent range.