Mortgage rates hit new lows but housing demand lags without tax credits

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A good news-bad news scenario continues on the housing front, with mortgage interest rates dropping again to record lows, according to the latest survey by home-loan buyer Freddie Mac.

The bad news: With the winding down of government stimulus programs, even fewer people are taking advantage of the eye-popping rates to buy homes.

The lenders that Freddie surveyed early this week were offering well-qualified borrowers 30-year fixed loans for up to $417,000 at an average rate of 4.58%, the lowest since the survey began in 1971.

For 15-year fixed-rate mortgages the average was 4.04%. Adjustable-rate loans with the first five years at fixed rates were being offered at an initial rate of 3.79%.

The borrowers would have paid an average of 0.7% of the loan balance in upfront lender fees and points, Freddie Mac said in its survey Thursday, and would have had 20% down payments or equity in their homes.

For solid borrowers who shop around and pay 1% of the loan balance in fees, rates were lower yet, mortgage professionals said. The website freerateupdate.com, which tracks rates being offered through brokers, said 30-year funding was available at 4.25% for such borrowers and 15-year mortgages at 3.75%.

The bad news, of course, is that the rates are scraping bottom because of fears that the global economy is in terrible shape. And that has continued a pattern that economists are watching with mounting concern -- a mini-boom in refinancings coupled with lagging actual home purchases.

A Mortgage Bankers Assn. index released Wednesday showed applications for refinance loans jumped 12.6% last week from the previous week and were at the highest level since the week ending May 22, 2009.

An index of home purchase applications, by contrast, fell 3.3% from one week earlier. That left refis at 76.8% of total applications, the highest share since April 2009.

‘The bad news is we’re driving rates down and there’s still nothing on the housing sales side,’ said
Anthony Sanders, a senior scholar in real estate finance at George Mason University’s Mercatus Center. ‘It’s mostly refinancings, and 50% of the sales out there are foreclosures and distress sales.’

Sanders noted that spooked investors worldwide are pouring funds into U.S. Treasury securities, still regarded as a bastion of safety. With the increased demand, the yield on Treasuries has dropped, dragging down the yield on Freddie and Fannie Mae mortgage bonds in the process.

The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgage rates, dropped below 3% this week for the first time in more than a year.

That ultimately means lenders can offer lower rates on the mortgages backing the bonds.

Loans insured by the Federal Housing Administration remain available with 3% down payments to those who can qualify and pay the premiums for the insurance.

But government-controlled Fannie Mae and Freddie Mac have tightened their lending standards after heavy losses left them wards of the U.S. government. Federal tax credits for home buyers ran out at the end of April, and unemployment remains distressingly high, Sanders said.

‘The facts of the matter are that we’ve exhausted what the government can do for the housing market,’ Sanders said. ‘The tax credits were the last hurrah of the stimulus.’ Not surprisingly, given his comments, he’s expecting another dip in housing prices as ‘the subsidies go away, the Bush tax cuts wear off and healthcare costs go up.’

--E. Scott Reckard