Posted on 10/18/2003 1:29:50 PM PDT by sourcery
A funny thing happened last week. Mortgage rates remained basically unchanged, inching up just 2 basis points to 5.81% from 5.79% a week earlier, according to the Mortgage Bankers Association of America. But demand for refinance loans and purchase loans dropped. Like a rock.
This was not your garden-variety drop. It was a huge plunge: Applications for refi loans sank more than 22%. Applications for purchase loans crashed 19%.
Refinance applications are now down MORE THAN 75% from their late-May peak while purchase applications are at their lowest level since April.
What's going on? It's pretty obvious ...
* The big reason consumers were rushing to refinance their mortgages until May of this year was FALLING mortgage rates. Whenever rates fell another notch, it generated a new crop of mortgage refinancing. But when rates STOPPED falling, the new demand began to dry up. And now, although mortgage rates did not rise very much in the most recent week, they are still up 75 basis points (three quarters of a percent) from the multi-decade lows set in the spring. That's killing the mortgage refi boom.
* When mortgage rates were falling, new home buyers could thumb their noses at rising home prices. "So what if the house is more expensive?" they said. "As long as our monthly payments are lower, who cares?" Now, though, the price increases of the past five years are finally going to cause sticker shock. Indeed, during that period, personal income rose 23% while the average price of a new home jumped 27% and the average price of an existing home skyrocketed 39%.
Combine the two factors -- higher mortgage rates AND higher home prices -- and the result is a significant jump in monthly payments. That means big trouble for the housing market.
Remember: The mortgage boom is what powered demand to the frothy bubble level where it still rests today. Now, what will happen as the mortgage boom comes to an abrupt end? What will be the impact on the rest of the economy?
Consider this scenario ...
* Higher mortgage payments end the boom in home sales ...
* Home prices stagnate and then actually begin to decline ...
* Homeowners can no longer easily tap into their home equity ...
* A huge source of new cash into the economy -- for spending or even stock market investing -- dries up ...
* Real estate, mortgage and construction industries -- among the few that were ramping up their hiring -- start shedding workers ...
* The real estate industry drops many of the 64,000 jobs it has added since May 2000 ... the construction industry drops many of its 70,000 ... and the credit intermediation industry (which includes mortgage lenders) drops a big portion of the nearly 250,000 jobs added since 2000.
* All industries that feed off of a booming housing market -- furniture, carpeting, home appliances and more -- fade quickly.
* The entire consumer economy sinks, setting off a chain reaction of declines in virtually every industry.
This won't happen tomorrow. But as long as mortgage rates continue moving up, it's hard to imagine how it can be avoided in the months ahead. And whether this scenario starts unfolding now or next year, it's certainly not too early to take protective action: Reduce your debt. Avoid sinking more money into investment real estate. Build liquid cash, regardless of how low the current yield may be.
Does this guy not remember the 21% interest rates in the late 70's.
Geez.
Fannie is dragging the bottom of the river now by offering new home financing to low income no money down high risk buyers. In other words, you only qualify if you can prove that you can't afford the home. Hummm . . . yep, that is going to work out really well.
Richard W.
There are bigger factors at work. Mortgage rates can't trend down much while 10-year treasuries are headed up. Not for long, anyway. These are highly interrelated instruments.
Because very strong fundamental macroenomic forces are pushing rates higher. Examples: US trade deficits, US budget deficits.
Because interest rates cycle from high to low to high--and we've just passed the low point for this cycle. Rates have already reached historic lows. You thought such rates were here to stay, perhaps?
"Yes" if you're a "Non-Conforming" borrower, "No" if your credit rating is good. Conforming borrowers will most often go for a 5/1 ARM (fixed for 5 years, variable annually thereafter) if they are willing to forego a fixed-rate mortgage, which most are not during this period of historically low rates.
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