Lower interest rates are supposed to spur buyer interest, but the plethora of government incentives has pulled forward demand, and few buyers are left over to clean up the mess.
Mortgage rates look primed to go to new generational lows.
But if the housing-market recovery is fading, will another drop in loan rates be enough to rekindle demand?
Or are we simply running low on interested buyers -- or at least, potential buyers who’d be able to qualify for a loan in this new era of tighter credit?
In a good sign for home loan rates, yields on 30-year mortgage-backed bonds issued by Fannie Mae and Freddie Mac fell on Tuesday to new 52-week lows as long-term Treasury bond yields also slumped. The benchmark Fannie Mae yield slid to 3.87% from 3.92% on Monday; the benchmark Freddie Mac yield dropped to 3.90% from 3.96%.
Both fell below 4% this month for the first time since briefly trading under that level in late November.
The Fannie and Freddie bond yields directly influence mortgage rates charged by lenders because recent home loans are what back newly issued bonds. As investors accept lower yields on the bonds new loan rates can fall as well.
Mortgage rates have mostly been declining since early-April along with the Fannie and Freddie bond yields. Freddie Mac’s weekly survey of lenders found the average 30-year loan rate offered to borrowers was 4.75% last week, down from 5.21% in early-April.
Mortgage-backed-bond yields below 4% don’t mean that home loan rates are heading for that level soon. Still, the slide in yields should help tug loan rates down further from current levels, which already are near generational lows.
The question is whether cheaper mortgage rates can fuel a new wave of housing demand.
The National Assn. of Realtors’ report Tuesday on May existing home sales was weaker than expected, at 5.66 million units (annualized), down 2.2% from April’s pace. Economists surveyed by Bloomberg News had expected a 6% increase.
The decline occurred despite the continued spillover benefit of the federal first-time home buyer tax credit that expired April 30. To qualify for the credit a buyer had to have a purchase contract by April 30, but the deadline for closing the deal is June 30.
Naturally, the Realtors tried to put the best face on the numbers. “Very affordable mortgage interest rates and stabilizing home prices are encouraging home buyers who were on the sidelines during most of the boom and bust cycle,” NAR President Vicki Cox Golder said in a statement.
Yet the inventory of homes on the market was 3.9 million units at the end of May, an 8.3-month supply at current sales rates and down just 3.4% from April. And that’s not counting the shadow inventory.
As the Calculated Risk blog noted, the 8.3-month inventory level “is significantly above normal, and is especially concerning because the reported inventory is already historically very high. After the tax-credit related activity ends, the months of supply will probably increase, and the ratio could be close to double digits later this year. That level of supply will put additional downward pressure on house prices.”
If potential home buyers figure prices are heading lower again, the incentive provided by falling mortgage rates could be muted. What’s more, buyers may figure that if they wait they might get not only cheaper prices but lower loan rates as well, if the economy weakens in the second half.
Of course, if the economy began to create permanent jobs at a decent rate that could bolster the ranks of people confident enough to buy a new home or trade up. But the May employment report was dismal, raising fears that significant employment gains will remain hard to come by in this economy.
As even the Realtors were willing to note Tuesday, “Job growth and a manageable level of foreclosures are keys to [home] sales and price performance during the second half of the year.”
Falling mortgage rates could help, but they clearly didn’t have an overwhelming effect on existing home sales last month.
-- Tom Petruno
Peak buyers couldn't afford it
The owners of today's featured property paid $965,000 on 7/13/2006. They used a $765,000 first mortgage and a $200,000 down payment. The stopped paying in late 2009, and they lost their entire down payment.
Foreclosure Record Recording Date: 06/02/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 01/29/2010 Document Type: Notice of Default
Home Purchase Price … $965,000 Home Purchase Date .... 7/13/2006
Net Gain (Loss) .......... $(311,700) Percent Change .......... -32.3% Annual Appreciation … -8.1%
Cost of Ownership ------------------------------------------------- $695,000 .......... Asking Price $139,000 .......... 20% Down Conventional 4.80% ............... Mortgage Interest Rate $556,000 .......... 30-Year Mortgage $140,648 .......... Income Requirement
$2,917 .......... Monthly Mortgage Payment
$602 .......... Property Tax $250 .......... Special Taxes and Levies (Mello Roos) $58 .......... Homeowners Insurance $181 .......... Homeowners Association Fees ============================================ $4,008 .......... Monthly Cash Outlays
-$707 .......... Tax Savings (% of Interest and Property Tax) -$693 .......... Equity Hidden in Payment $255 .......... Lost Income to Down Payment (net of taxes) $87 .......... Maintenance and Replacement Reserves ============================================ $2,950 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $6,950 .......... Furnishing and Move In @1% $6,950 .......... Closing Costs @1% $5,560 ............ Interest Points @1% of Loan $139,000 .......... Down Payment ============================================ $158,460 .......... Total Cash Costs $45,200 ............ Emergency Cash Reserves ============================================ $203,660 .......... Total Savings Needed
Property Details for 26 ARBORSIDE Irvine, CA 92603 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 full 1 part baths Home size: 1,545 sq ft ($450 / sq ft) Lot Size: n/a Year Built: 2002 Days on Market: 120 Listing Updated: 40331 MLS Number: U10000866 Property Type: Condominium, Residential Community: Turtle Ridge Tract: Arbl ------------------------------------------------------------------------------ According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
The former plan 2 model in gated community of Arborel in Turtle Ridge. Spacious 2 bedroom and loft can be converted to a 3rd bedroom. An award winning design by California Pacific Homes, the property is inspired by Tuscan influences. Private walled patio off the dining room is conducive to relaxing moments in the garden. Community is gated and has amenities that include a cabana lined pool, spa, barbeque, clubhouse facilities, hiking trails and sports park. Acceptance of offer subject to lender of records approval of a short sale purchase.
Doesn't the phrase "inspired by Tuscan influences" sound rather tawdry.
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