Mortgage rates fall, but lending requirements still tight

Bloomberg NewsMay 30, 2014 

WASHINGTON -- This was supposed to be the year that U.S. mortgage rates soared. Instead, they're retreating.

Interest rates unexpectedly fell this year after the Federal Reserve began scaling back the stimulus that held borrowing costs near record lows since 2011. After five weeks of declines, rates for 30-year fixed loans are at 4.12 percent, the lowest in seven months, Freddie Mac said Thursday.

The housing market, in the season that's traditionally its busiest, can use the help, even if it's short-lived.

Soaring home prices and a one percentage point spike in rates from May to August last year cut into affordability and slowed the real estate recovery.

While the falling borrowing costs have forced economists at the National Association of Realtors and Moody's Analytics Inc. to lower forecasts, they still expect 30-year rates to lurch closer to 5 percent by the end of the year.

"It's a temporary window of opportunity for buyers in that a year from now rates will be higher," said Mark Zandi, chief economist for Moody's Analytics in West Chester, Pennsylvania. "The housing market could use it given how it's gone sideways. But I wouldn't count on these low rates for very long."

The decline in borrowing costs has so far done little to spur sales, which have been weighed down by tight credit and lower-than-normal inventory levels. Contracts to buy previously owned houses in the U.S. increased 0.4 percent in April, less than economists estimated. They are down 9.2 percent from a year earlier, the National Association of Realtors said Thursday.

"Those who can qualify for credit and expect rates to increase will jump in, but the biggest hurdle to homeownership is getting credit and standards are still very tight," said Anika Khan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. The decline in borrowing costs is more likely to spur buyers of cheaper homes, yet more purchases have been of pricier homes, she said.

Purchases costing $1 million or more rose 7.8 percent in March from a year earlier, according to data from the National Association of Realtors last month. Transactions for $250,000 or less, which represent almost two-thirds of the market, plunged 12 percent in the period.

Buyers in March paid 12.4 percent more for homes compared with a year earlier, according to the S&P/Case-Shiller index of 20 cities. And mortgage rates are well above year-ago levels. Rates spiked from a near record low of 3.59 percent last May around the time that the Fed chairman said that the central bank would start tapering its bond-buying program as the economy improved.

The higher rates killed the wave of refinancing, shrinking the mortgage market. While the Fed has begun tapering, rates have continued to fall because, in part, its mortgage-backed securities purchases now make up a larger share of a smaller market, said Nela Richardson, chief economist for Redfin, a Seattle-based brokerage firm.

Mortgage originations in the first quarter declined 58 percent from a year earlier to $235 billion, the lowest in 14 years, according to Inside Mortgage Finance. Refinancings made up about 44 percent of the market, compared with 78 percent a year earlier.

"Eventually, the Fed tapering will outpace the supply of mortgage originations, but it hasn't happened yet," Richardson said. "Until that inflection point, the Fed will be the biggest elephant in the room and that will keep mortgage rates low."

Investors overreacted a year ago to the Fed's decision to slow bond purchases, and the market is now adjusting to reality, said Guy Cecala, publisher of Inside Mortgage Finance.

"To some extent, the drop in rates we've seen is loosening of panic and recognition that the Fed's share of new mortgage- securities production is the same as it was before it began tapering," Cecala said. "As long as the economy stays in neutral or first gear, we're not going to see much upward pressure on interest rates."

The National Association of Realtors and Moody's Analytics both lowered their 2014 forecasts for 30-year loan rates to 4.5 percent. Capital Economics, which reduced its projection this month, said rates will climb to 4.75 percent by the end of the year. The Mortgage Bankers Association expects them to reach 5 percent this year and 5.3 percent next year.

Khan of Wells Fargo is predicting the 30-year fixed rate will be 5.4 percent by 2015 as gross domestic product growth reaches 3 percent and inflation settles around 2 percent.

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