Can anyone say “tax-credit-induced hangover”?
Mortgage rates are still near 50 year lows, but demand for new-purchase mortgages fell for the fourth straight week to a new 13-year low, according to the Mortgage Bankers Association.
Average rates on 30-year fixed-rate loans were up slightly last week, to 4.83% from 4.8% two weeks ago. The effective rate, which factors in fees and other loan origination costs, also increased slightly from two weeks ago. That’s not unusual—rates often tick up modestly after dropping sharply as banks become inundated by a wave of applications.
When the year began, mortgage analysts predicted that 2010 would be the year when purchase mortgage activity overtook refinance activity. Those predictions could still come true for the second half of the year, but the unexpected fall in interest rates over the past month has sent refinance activity up to its highest level in nearly eight months. Refinances accounted for 74% of all mortgage applications last week, according to the MBA.
Over the past month, refinance demand is up by a seasonally-adjusted 11.5%, while purchase demand is down 12%. Low rates don’t always offer a big boost to home sales, as opposed to refinancing, because there are several other factors that drive decisions to buy homes. For example, the $8,000 tax credit for home buyers that expired on April 30 likely did more to encourage purchases than slightly lower interest rates in May.
Still, while it’s unclear how big a benefit these low rates will deliver to home sales, they certainly don’t hurt. Three months ago, few foresaw the Euro debt crisis flaring up in a way that would help put downward pressure on mortgage rates—and some had warned that a big spike in mortgage rates might force the Federal Reserve to resume its purchases of mortgage-backed securities.
Higher rates would make it harder for some borrowers to qualify for loans, and they could also limit potential buyers to smaller loans. Now the opposite is true. More borrowers can qualify with low rates, and borrowers will find that their buck goes a bit further with a 4.75% rate than it did with a 5% rate.
But will low rates simply allow sellers to hold the line on price? And will they encourage home buyers who already missed the tax credit to pull the trigger on a purchase? Time will tell.