Are you getting a good deal on your mortgage rate?
Here is what we know,
According to mortgage professionals, getting home loans starting at 3% is a great deal.
A dramatic decline in mortgage rates has been noted in the past month to November 2012 levels.
Mortgage rates have gone down to its lowest level in nearly four years at 3.31 percent for standard 30-year fixed rates.
While the decline is good news to people who want to refinance, it has resulted to questions on the state of the global economy.
What We Know Of Current Mortgage Rates
The decline in interest rates is based on a different macroeconomic perspective as compared to what happened after the economic downturn years ago.
The Fed worked on enhancing its balance sheet in 2012 through the purchase of mortgage-backed securities and Treasuries, which essentially led to the decline in interest rates.
Here’s the deal:
These purchases were ended by the Fed, which worked on relaxing the policy of keeping interest rates at near zero levels. This was implemented to deal with the financial crisis.
Mortgage rates are not expected to go below its current level since the Fed has stopped purchasing assets to lower interest rates.
Since prices increased significantly due to the purchases of the Fed in 2012, it resulted to lower yields.
With the absence of any stimulation on the demand and supply balance, the significantly low interest rates are expected to be a temporary situation.
The ten-year Treasury yield, which is considered as sign of mortgage rate changes, is suitable proof of the decline in interest rates.
The past month showed a reduction in the ten-year yield to its lowest level since 2012 but has increased due to movements in the market.
Mortgage rates would have been lower if the yield went down to its lowest levels in 2012.
What’s the bottom line?
A statement released by Freddie Mac on Thursday showed that the average thirty-year fixed mortgage rate was at 3.57 percent, which is lower than the 3.61 percent last week. It is also the lowest level since May of 2013.
a decline on the fifteen-year rate was also noted from 2.86 percent to 2.81 percent.
Ten-year treasury yields also went down following the release of the job information by the Labor Department. The information showed the addition of the lowest number of jobs for the past seven months in the month of April.
Employment figures and other economic areas are being monitored by policy makers at the Federal Reserve to give them an idea when interest rates should be increased.
No action was taken during the last meeting as they indicated any movement will be made gradually, which means there would be no spike in mortgage costs in the near future.
A 4.5-percent increase in mortgage rates during the summer will only result to an additional $700 on annual mortgage payments for homes costing around $200,000.
Why did interest rates go down again?
Since the Federal Reserve did not make any changes in the demand and supply, questions were raised on the reason behind the recent decline on interest rates. The likely reason for the decline may be a major international event that spooked the market.
It is related to both market psychology and hard economics.
Whenever such an international event happens, movement in the market is expected as central banks would react or extend policies for easy money to deal with any economic slowdowns. This would result to a decline in interest rates in the same level as 2012.
The question is what type of event would result to this situation? It may be a slump in the GDP or labor market of the United States.
This may result from adverse news coming from China similar to what happened in August 2015 and January 2016. During these instances, a sharp decline in mortgage rates was noted, which resulted to concerns in the entire market.
Federal funds rates are the interest rates primarily manipulated by the Federal Reserve.
This rate is paid by banks whenever they take out overnight loans from each other. In comparison, mortgages are unlike overnight loans.
The prices have the tendency to be connected to long-term borrowing rates, which are normally the ten-year Treasury bonds.
It is not the thirty-year bond since only a small number of homeowners pay for the entire loan before they move or resort to refinancing.
Things investors should anticipate
In my opinion, it may be necessary for investors to recognize the situation when the rates went down to this level to be able to determine the effect of the economy of today on any changes in the future.
The years following the international financial crisis saw a refinancing boom encouraged by low interest rates, which benefited banks across the country.
Prominent mortgage companies, such as Bank of America and Wells Fargo, were able to compensate weaknesses in legacy mortgage assets, commercial real estate and chaotic market trading with the fees they collected from this surge as well as its volume.
It facilitated an increase in the capital they required to pay off fines and settlements amounting to billions of dollars due to misconduct that resulted to the crisis in the first place.
Activity in the real estate and lending industries is expected to be boosted by the current low interest rates similar to what happened in 2012.
Current activity is dependent on the overall stability of the real estate market.
The market is spurred by home purchases instead of refinancing activities, which was the main driver in 2012.
It is logical to see that the increase in home prices correspond to a lower level of refinancing activities.
Wells Fargo, the Bank of America and other lending companies may consider the current low rates more influential on consumers as well as home loan companies aiming to get funds as well as refinance their loans simultaneously.
Wells Fargo is the only major financial institution to see its revenues increase during the first quarter due to its mortgage business.
On the other hand,
profits of the consumer banking unit of the bank of America increased by 22.2 percent at $324 million during the first quarter when compared to the first quarter of last year.
These positive developments are simply the beginning of things to come if interest rates remain low or go down further.
This opportunity is supported by current economic data. The month of April saw an increase of over 13 percent in mortgage application in contrast to the same period last year.
Housing also increased by 31 percent during the same period while an increase of 18.5 percent and 17.5 percent was noted in homes under construction and finished homes, respectively.
Even as no reaction was noted in the stock market on the potential, the Toll Brothers is currently preparing for some movements in the market.
Stock prices declined by over 21 percent for the past twelve months even as the S&P 500 declined by 1.2 percent.
However, the management of the Toll Brothers in anticipating an increase in revenues by around 25 percent each year as profits and efficiency will experience strong growth.
In my opinion,
any volatility in the market due to any unexpected events that may result to economic problems causing the market to be spooked will be a sensible opportunity to buy the stocks of builders or lenders benefiting from lower interest rates resulting to new purchases in the US real estate market.
The critical factor is to avoid panic and remain focused on valuable companies as well as wait for the opportunity to acquire stocks at a lower price in the market.
Because of Mortgage Rates Home prices are expected to fall
Another important factor to consider is the fact that home prices normally fall when mortgage rates increase.
Home prices are expected to decline with an increase in interest rates. But, this will not happen immediately.
This is good news for buyers. For the moment, a good number of cities are considered as “seller’s markets.”
The number of homes for sale is higher than the number of people aiming to purchase a home.
Suitable time for refinancing
One important milestone to consider is the point when mortgage rates reach 5 percent, which can be a critical moment.
As of now, experts think the only individuals acting soon are those aiming for refinancing, but this opportunity is not expected to pass right away.