Why aren’t falling mortgage interest rates increasing sales?

Falling mortgage interest rates allow people to borrow more and pay more, but the economy must create high-paying jobs to revive the housing market.

enticedReal estate demand has two components: purchasing power, and total number of qualified buyers. Low mortgage rates increases the buying power of the majority who use financing, so low rates tend to make prices rise; however, low rates do nothing to increase the size of the buyer pool to improve sales volumes. Our current economic environment, the weak job and wage growth hobbles housing; thus transaction volumes are very low, despite low mortgage rates.

By the beginning of next month, mortgage interest rates will be lower year-over-year. Ever since mortgage rates rose abruptly last May and June, the housing market has stalled at the limit of affordability. Recently, mortgage rates have fallen to 9-month lows, and the tepid demand is keeping them low as lenders compete for the little available business. Market watchers are starting to wake up to the fact that we need to produce more high-paying jobs to increase sales volumes.

Lowest rates in a year do nothing for mortgages

Diana Olick, Wednesday, 4 Jun 2014 | 7:01 AM ET

 Mortgage rates fell last week, and in an unusual convergence, so did applications for refinances and home purchase loans.

(See: Mounting evidence of housing market’s extreme sensitivity to mortgage interest rates)4.2.7

The average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.26 percent from 4.31 percent, according to the Mortgage Bankers Association. Interest rates on jumbo and federally insured FHA loans also fell, touching their lowest levels in nearly a year. …

“The lack of movement on mortgage applications even with a significant drop in rates confirms what we have seen for much of the past five years. Namely, that lower rates alone are not enough to generate home purchase activity,” said Guy Cecala of Inside Mortgage Finance. “Home prices, mortgage underwriting, employment, and a basic belief that it is a good time to buy home are major factors that seem to influence home buying more than rates.”…

many people are struggling with their personal finances. A new survey from the MacArthur Foundation, conducted by Hart Research Associates, found that while the public may believe the housing crisis is improving, many respondents do not feel personal relief with their monthly housing costs: seven in 10 believe the U.S. housing market is still in the middle of the crisis or that the worst is yet to come.

“Reinforcing survey findings from 2013, attitudes about homeownership have shifted, with 43 percent indicating it is no longer the case that owning a home is, ‘an excellent long-term investment and one of the best ways for people to build wealth and assets,’ and more than half believing that buying a home has become less appealing than it once was,” according to the survey.

While most Americans still aspire to home ownership, they do not believe it is the wealth-building vehicle it once was.

(See: Is home ownership still the American Dream?)

Mortgage Rates Are Falling, So Where Are the Home Buyers?

Jun 5, 2014, By Nick Timiraos

Mortgage rates have fallen close to their lowest levels in nearly a year, but housing demand hasn’t budged much yet. …

True, mortgage rates are low—as low as they’ve been in almost 12 months. But in the same way that shoppers may not be lured by “low prices” at a department store that is always advertising a sale, mortgage rates at 4.1% may not be seen as a steal by buyers who lived with rates that were even lower for all of 2012 and the first half of 2013—especially considering that prices have moved higher.

Higher prices are the real problem. From early 2012 to mid 2013, house prices rose significantly despite weak employment data and flat incomes. If houses get more expensive, marginal buyers get priced out, and without toxic mortgage products to help them, a depleted buyer pool results in low sales volumes.

 So do rates really matter? At the margins, yes. They’re a key component of a borrower’s monthly payment. And often the first conversation between a real-estate agent and a potential buyer—”How much are you willing to spend?”—can be influenced quite a bit by mortgage rates, provided the buyer isn’t paying entirely in cash.

What does this payment picture look like right now? The monthly payment on the median-priced U.S. home fell from $673 in February 2011 to $552 in September 2012 as interest rates fell. Interest rates stayed low through May 2013, but the average payment rose to $586 as home prices ticked up. (These calculations assume a 20% down payment on the national median home value as calculated by Zillow).

After interest rates jumped last summer, that average payment bounced to $674 in September 2013. Rising prices and, especially, higher rates eroded the affordability gains of the previous 2½ years in a matter of months. Payments haven’t budged much since then.

I have an update on the local housing market due out soon. It shows the same pattern of flat cost of ownership for the last full year.

Modest declines in interest rates have offset modest gains in home prices.

Some look at this and say: wait a minute, a 4.5% mortgage is still an insanely good deal. Why would a rise in rates to levels that are still quite low hurt housing demand? One possible explanation: the overall level of rate matters over the long run, but the speed with which rates rose last year could have dented demand in the short run.

Several economists have argued recently that mortgage rates increases played an important role in last year’s sales slowdown. In part, that’s because activity received a larger boost when mortgage rates were falling from 2011 to 2013 than previously anticipated …

Last year’s mortgage rate increase accounts for nearly half of the difference in expected housing growth and the lower, actual growth, according to a separate analysis published last week by economists at the Federal Reserve Bank of Cleveland. …

Low rates and prices may have spurred the release of pent-up demand throughout 2012, as home prices began to rise. This one-time benefit, together with aggressive home purchase by investors (also a temporary phenomenon), could have given false signals about the true health of the demand side of the market in 2012 and 2013.

The market was undervalued based on the relationship between the cost of ownership and the cost of rent in 2012 and 2013. That gap is gone now. The increased volume of investor purchases certainly made the market look healthier than it was — not that many financial reporters talked about that. Large real estate investor purchases steeply decline in California and elsewhere, so sales are off this year.

Moreover, incomes have showed little growth, meaning that it will be harder for more buyers to buy homes if prices continue to rise absent some gains in wages or even bigger declines in financing costs. Sales are also being restrained by low levels of homes for sale, which is pushing prices higher. Some would-be buyers don’t have enough equity to sell their current home, while others have high levels of student debt.

The simple truth is that we have played out the available stimulus. Lower interest rates aren’t going to be able to raise prices much further. The economy needs an influx of high-paying jobs, and unless it gets them, the housing market will be stalled at current price levels on low transaction volumes.


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