Real Estate & Mortgage Insights

How Obscenely Low Mortgage Rates Will Affect the Housing Market

Last week the Federal Reserve announced its new plan, Operation Twist, an effort to further push down mortgage interest rates while trying to boost the economy. It's an interesting choice, to say the least, as home loan rates were already at record lows and had done very little to stimulate the ailing housing market. Now the question is: Will even lower rates be the magic bullet?

The Feds plan is to sell off their short-term Treasuries and buy an equal amount of longer-term debt. The announcement had the desired effect and the average rates on long-term mortgage interest rates plunged down to new record-breaking lows during the week ending September 29. According to mortgage giant, Freddie Mac, the 30-year fixed rate mortgage (FRM) carried an average interest rate of 4.01 percent, excluding fees, down from the previous low the week before of 4.09 percent. The new rate is the lowest since 1951. Rates on 15-year FRMs fell to 3.28 percent, the lowest on record.

So far, those dramatic rate drops have in fact spurred some mortgage application activity.

"Mortgage rates declined last week, at least partially in response to the Fed's announcement that they would shift their portfolio towards longer-term Treasury securities, and that they would resume buying mortgage-backed securities," said Mike Fratantoni, Vice President of Research and Economics of the Mortgage Bankers Association's. "With lower rates, refinance application volume increased to its highest level since August 19, 2011. Purchase application volume also increased."

The MBA's refinance application index grew 11.2 percent during the week ending September 29, while the home purchase application index, a measure of likely future sales, rose 2.6 percent. Also, while refinance loans can be helpful to the economy, by lowering homeowners' monthly payments, refinance requests currently make up 79.7 percent of all mortgage applications, suggesting that rates don't need to go lower to attract loan customers. What's more is that all the refinances to date don't seem to have put much life back into the economy.

The true problem remains with home sales and it is highly unlikely that lower interest rates will do much to bolster purchases. Rates have been below 5 percent for the entire year and sales have been dismal, both for new and existing homes.

Rock bottom borrowing costs "are only a marginal support right now," Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. told Bloomberg in a telephone interview. "Mortgage credit is still tight and secondly, on the demand side, households are concerned about the job market and falling house prices."

For example, new home sales fell in August to their lowest point in six months, according to the Commerce Department, and despite ultra-low rates, sales of new homes are on track to have their worst year on record. Existing home sales have been up and down this year, but have largely been fueled by investors snatching up bargains on distressed properties.

So, Operation Twist may indeed continue to bring long-term interest rate down to unheard-of levels, but it is hard to see how that will help the main problems impacting the housing market and economy today, namely high unemployment rates and restrictively tightened credit standards.