Falling US mortgage rates spark rush to refinance
Mortgage costs follow slide in treasury yields in wake of weak overseas economic data, giving homeowners opportunity to lower payments
The drop in mortgage rates below 4 per cent has cut into Debra Shultz's sleep. The New York City banker is busier than she has been in months, working with three dozen homeowners eager to lower their payments.
Shultz last Wednesday helped a Greenwich Village homeowner lock in a 3.63 per cent interest rate for a 30-year fixed jumbo mortgage of more than US$900,000. An hour later, the rate jumped to 3.75 per cent. One lender changed its rate sheet six times that day.
"It just went crazy," said Shultz, a senior vice-president of mortgage lending at Guaranteed Rate in New York. "I sent out a blast email to 1,600 clients and had 30 responses right away."
Mortgage rates are following a slide in 10-year treasury yields as weaker-than-expected economic data from Germany to China combine with concern about the Ebola virus, sparking demand for safe investments.
The average rate for a 30-year fixed mortgage dropped to 3.97 per cent, the lowest since June last year, Freddie Mac said.
Borrowing costs rose last month before dropping for the past four weeks, giving owners a new opportunity to refinance.
"This is bizarro world," said Anthony Sanders, an economics professor at George Mason University in Fairfax, Virginia. "Usually we associate lower interest rates with lower volatility. Now you're seeing the opposite."
A gauge of US mortgage refinancing jumped 10.6 per cent in the previous week, the most since early June, the Mortgage Bankers Association said.
The share of home-loan applicants seeking to refinance climbed to 58.9 per cent, the highest since February, from 56.4 per cent, it said.
In December 2012, after the 30-year average rate hit a record low of 3.31 per cent in November, borrowers wanting to refinance accounted for 84 per cent of applications.
At Quicken Loans, the fourth-biggest mortgage lender in the country, application volumes doubled in the past week, chief economist Bob Walters said.
While Quicken's levels were approaching those of the past two years, other lenders would struggle to keep up with demand after cutting jobs because of depressed lending, Walters said.
"It won't be long before most lenders will be full up," he said. "Closing times will be longer and mortgage companies will raise rates."
JP Morgan Chase, Wells Fargo and Citigroup all posted mortgage lending gains in the third quarter.
Refinancing by homeowners, who took advantage of the lowest interest rates of the year, drove the industry's growth, according to an estimate by the Mortgage Bankers Association.
Banks' lending remains far below last year's levels as they struggle to increase home-purchase mortgages after imposing tough credit requirements.
Housing sales, which have declined from a year ago, would not get much of a boost from a short-term drop in rates, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
It typically takes months for buyers to find properties and close deals, and by then rates would have changed.
If rates stayed below 4 per cent for a full year, it would boost home sales by 5 per cent and housing starts by about 10 per cent while causing refinancing to double next year, said Mark Zandi, the chief economist for Moody's Analytics.
"The decline in rates, if they stick around for any length of time, is a plus for housing and mortgage markets that will take the edge off other restraints on housing demand," Zandi said.
New home construction rose last month after slumping in August. They climbed 6.3 per cent to a 1.02 million annualised rate from a 957,000 pace, the Department of Commerce said.
Rates for 30-year loans began rising from 3.35 per cent in May last year after the Federal Reserve signalled it would start to unwind its stimulus plan aimed at keeping borrowing costs down.
At the beginning of this year, with rates at 4.53 per cent, housing forecasters projected mortgage rates would continue to rise throughout the year. Instead, rates went down to 4.12 per cent by May because of the economic malaise in Europe and political strife worldwide. They remained more or less flat before rising in the middle of last month to about 4.23 per cent. Rates have fallen since then to a 16-month low of 3.97 per cent.
Forecasters are offering divergent outlooks for the coming quarters. The Mortgage Bankers Association said last month the average 30-year fixed mortgage rate would rise to 4.5 per cent in the fourth quarter.
Vitner said borrowing costs would continue to fall for weeks, and maybe months.
"The refi boomlet will give a lift to the financial sector," he said. "Given that this is a seasonally slow period for housing and the mortgage business, it's well-timed."
Shultz has been so busy fielding calls and emails from clients that she has had to work late into the night to prepare documents for refinancing. "I have so many loans to work on right now," she said.