A bizarre set of circumstances have manifested over the past several weeks, presenting a scenario only a scant few might have foreseen. The downgrade of American credit by Standard & Poor’s threatened to raise the cost of borrowing for the U.S., similarly to what we saw happen to Greece. Instead, fear of the broad global ramifications of the downgrade drove money into U.S. treasuries, driving up the price on demand and driving down the yield, or the cost of borrowing for the United States. This in turn has had beneficial impact to rates across the board, including for mortgages. So, what might have harmed the housing market from a rate only perspective instead is helping home financing affordability.
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.
The Mortgage Bankers Association (MBA) Wednesday reported that its Market Composite Index of mortgage activity jumped by 21.7% through the period ending August 5, continuing a strong trend that has accelerated through the last few weeks. The catalyst has been clear, decreasing mortgage rates. In fact, record low mortgage rates inspired a slew of refinancing last week alone.
With the average contracted rate on 30-year and 15-year fixed rate mortgages falling to 4.37% (from 4.45%) and 3.52%, respectively, the MBA’s Refinance Index reflected a 30.4% increase in activity against the immediately preceding week. Last week’s data also showed a strong improvement. Through this latest period, the share of refinancing activity to total activity increased to 75.6% from 70.1%. This record low rate strike has broken through the threshold for many to find economic value in refinancing. Starving mortgage brokers are not in need of more reason to make their phone calls to spur activity either, something we noted they were missing earlier this summer.
This week, mortgage applications tied to the purchase of homes proved inconsistent with refis. The MBA’s seasonally adjusted Purchase Index decreased 0.9% against the week before. This data is as impacted by weather as it is by rate changes, so perhaps the extreme summer heat and summer generally is keeping activity down, excluding the impact of great economic uncertainty, high unemployment, low consumer confidence and intense fear levels.
It’s paradoxical that this fear factor is actually offering a stimulant to the housing market and an economic value-add to consumers’, who are lowering their cost of financing. Perhaps this is the reason Fed Chair Bernanke was quiet on Monday and somewhat disciplined on Tuesday.
Americans should take advantage of this opportunity to lower their cost of debt by finding refinancing opportunities where available. I also believe that prospective home buyers with the job and money in hand would be well served to enter the real estate market now, especially with the vast pool of distressed property available at this dark hour. An important reasoning for my suggestion is my longer term expectations for rates. I do not expect the cost of capital to hang around current levels, or even remain low on a historical basis, for much longer.
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