Rates Drive Record Refinance Activity
Rates Drive Record Refinance ActivityBy Ted Ahern, Guaranteed Rate CFO
April 1, 2009
Mortgage rates remain at or near their historical lows. Low rates are driving record refinance activity and slowly helping the housing market find a bottom. Market participants are hoping the spring buying market and a stabilizing economy will draw in new buyers. Low rates translate into improved affordability for homebuyers as projected monthly housing costs decrease. March housing starts and new and existing home sales all showed modest improvements from the recent free fall since October. Short sales and foreclosures are estimated to make up 30-40% of all purchase transactions currently.
Several weeks ago, the Federal Reserve disclosed that it will buy an additional $750 billion of FNMA, FHLMC and GNMA mortgage backed securities in the open market over the next nine months. In November, the Fed committed to buying $500 billion of mortgage backed securities which in turn brought mortgage rates down to their current low levels.
Last month, the Obama Administration announced a $275 billion package directed at limiting foreclosures and the freefall in housing prices. The package includes $75 billion to reduce at-risk homeowners from going into foreclosure by reducing their monthly payments and outstanding principal. This piece of the plan is expected to help between seven and nine million homeowners. The plan is also targeting refinancing ‘under-water’ and high LTV loans which could potentially help an additional four to five million homeowners. The U.S. Treasury will also double the FNMA/FHLMC preferred stock backstop agreements to $200 billion each. All elements of the plan should help stabilize housing prices, limit foreclosures, and lower mortgage rates.
Home prices have fallen almost 30% nationally over the last two and a half years. Prices today are beginning to attract purchasers although many are waiting for the credit crunch to show greater signs of ending. Particularly, with the recent decrease in mortgage rates, the economics of buying a home have shifted materially with the current environment strongly favoring buyers. Sales of existing homes have slowly increased in the last seven months. Inventory is also slowly moving down but remains historically high as new foreclosures flood the market every month.
Home sales are currently running at an annual rate of 4.2M units which is actually lower than where the rate was 10 years ago. However, during the last decade, the population of the United States has grown by almost 10%, seven million new jobs have been created, and the percentage of households owning their own homes has risen from 66% to 69%, an increase of 3.2 million homeowners. Prices, interest rates, inventory, and motivated sellers make the current market one of the best in a generation to purchase a home.
Ted holds an MBA in Finance from the University of Chicago and is also an Adjunct Professor of Economics at Lake Forest College.