The 30-year fixed-rate mortgage dropped to 3.29% during the week ending March 5, a major decrease of 16 basis points from the previous week, Freddie Mac reported Thursday.
The Fed made this rare move to lower the federal funds rate by a half-point to a range of 1% to 1.25% in between its regularly scheduled meetings. The central bank noted that the move was in response to the “evolving risks” the COVID-19 coronavirus outbreak poses to the economy.
The decline in rates presents a major windfall for millions of homeowners across the country, who stand to save thousands of dollars in interest by refinancing.
Furthermore, an estimated 44.7 million homeowners have $6.2 trillion in home equity that they could access through a cash-out refinance, according to real-estate data firm Black Knight, and now they have the chance to access that cash at a lower interest rate.
The decline in rates has stoked another refinancing boom, said Sam Khater, chief economist at Freddie Mac. “Mortgage applications increased 10% last week from one year ago and show no signs of slowing down,” Khater said in the report.
Those who are considering refinancing shouldn’t wait on the sidelines, since it’s not guaranteed mortgage rates will drop much further than where they are now. Many lenders have hit their capacity in terms of how many loans they can process. While lenders have boosted hiring in response to this increased demand, they are worried about being caught flat-footed with excess staff when rates eventually move back up. “They don’t know how persistent these rates will be,” said Tendayi Kapfidze, chief economist at LendingTree.
An emerging risk that those looking to refinance may want to consider is the possibility of government orders to shelter in place amid the coronavirus outbreak.
“Are they actually going to be able to get people to their loan processing centers?” Kapfidze said. “Some of the work can be done remotely. But that might actually create friction in the system.”
Mortgage Applications Are Up
As low rates have been a boon to those looking to refinance, it has also greased the wheels for would-be homebuyers. Mortgage application data has shown that a growing number of Americans have been applying for loans to finance the purchase of a new home, a positive sign for the spring home-buying season.
There’s one problem though, according to economists. “In order to take advantage of low mortgage rates, buyers will need homes to buy,” said Danielle Hale, chief economist at Realtor.com.
In recent months, the inventory of homes for sale has an hit all-time low amid the high demand from buyers. The low inventory is largely the result of depressed home construction activity in the wake of the recession, which did not keep pace with household formation across the country. Many single-family homes were also purchased by investors during the bust years and converted into rentals, further constricting supply.
While home-building activity has ramped up since last summer, it is not occurring as such a pace that it could meet the demand in the market.
On the margins, the drop in rates could help push some people to sell their homes. Researchers have debated whether or not many Americans were “rate-locked,” meaning that the interest rate on their home loan was so low that it proved a deterrent from selling their home and buying a new one.
“These sorts of decisions tend to be shaped by factors more reflective of major events in individuals’ lives such as decisions to retire, have children, down-size, etc.,” said Mark Hamrick, senior economic analyst at Bankrate. “It is a lot different than opting to pick up a pack of chewing gum at the last minute at the checkout counter of the grocery store.”
Another factor that could prevent Americans from taking advantage of low rates is the overall health of the economy. If that takes a dive because of the coronavirus outbreak, then many buyers might get cold feet despite the potential savings they would be leaving on the table, Hamrick said.
“There’s no avoiding the fact that a home purchase is the most significant purchase individuals will make in their lifetimes,” he said. “That process can be fraught with nervousness under the best of times. If we see significant weakening in the broader economy, including weakening of the job market, it is hard to envision a scenario where the housing market can remain above that fray.”
The 15-year fixed-rate mortgage also fell 16 basis points to 2.79%, according to Freddie Mac. The 5/1 adjustable-rate mortgage dropped only two basis points to an average of 3.18%.
Expecting Record Low Mortgage
Inman News reported that Hale, realtor.com’s chief economist mentioned above, believes the move means we could see a new record low for mortgage rates.
“The surprise rate cut, the largest since December 2008, is a strong move by the Fed to shore up economic activity even though most economic data has not yet shown major slowing,” Hale said. “With last week’s mortgage rates hovering just 14 basis points above all-time lows even before the large Fed rate cut, a new low in mortgage rates seems almost inevitable.”
“Additionally, mortgage rates and affordability are not the biggest challenge in today’s housing market,” Hale added. “A lack of options continues to be the largest hurdle. If sick-days impede construction work or builder-supply chains, slowing down the supply of new homes, this could dampen home sales, too.”
Jason Abrams the vice president of the industry at Keller Williams told Inman that the company is closely monitoring the impact the cut will have on the market.
“We currently have historically low-interest rates and low inventory in many markets,” Abrams said. “And, it’s all part of the perfect equation for consumers to work with real estate agents on how to navigate the market in changing times and get the best deal.”
“This moment is an opportunity for agents to provide value and when the top agents will shine for their clients.”
Source: MarketWatch and Inman News