The Washington Post
By: Dina ElBoghdady
June 25, 2010
Mortgage rates have hit an all-time low, but consumers are responding with a big "So what?"
The average rate on a 30-year fixed-rate mortgage dropped to 4.69 percent this week from 4.75 percent last week, Freddie Mac reported Thursday. That marks the lowest level since the company started tracking the data in 1971 and breaks the most recent low set in December. Rates have hovered below 5 percent since early May.
Yet home sales are tumbling and mortgage applications are slipping. Potential buyers have retrenched, discouraged by employment fears, the recent expiration of a home buyer's tax credit and tough lending standards, industry experts said.
"Interest rates have no effect on buyer psychology anymore," said Glenn Kelman, chief executive of Redfin, a real estate company. "Now, interest rates fall to the floor and nobody cares."
The lull in home purchases follows a burst of activity in April and May, when people were rushing to take advantage of the tax credit -- $8,000 for some first-time buyers and $6,500 for certain repeat buyers. To qualify for that subsidy, buyers had to sign a contract by April 30 and they must close the deal by Wednesday.
As the program wrapped up, home purchases plummeted. Industry figures released this week showed that sales of existing homes fell 2.2 percent in May from April, and government data showed that sales of new homes plunged nearly 33 percent during the same period.
Jennifer Du Plessis of George Mason Mortgage said she sees that trend continuing.
"Ever since the home buyer tax credit expired, people have backed off on the buying side," Du Plessis said. "I still have buyers, but they're trickling in."
Mortgage rates are low because investors, nervous about global economic stability and a volatile stock market, are plowing their money into mortgage securities backed by Fannie Mae and Freddie Mac, assets that investors perceive to be relatively safe bets.
Michael Fratantoni, a vice president at the Mortgage Bankers Association, said the volume of mortgage applications for home purchases is now at a 13-year low. Purchase applications have dropped for six of the past seven weeks. They are down 30 percent from April, when the tax-credit frenzy peaked, he said.
Fratantoni said consumers have grown used to the low rates, which have bounced around the mid-4 percent to the low-5 percent range for more than a year. They're more worried about stagnant wages and high unemployment than a spike in mortgage rates, hence their reluctance to buy, he said.
Although the economy added more jobs in May than in any other month in the past decade, the job growth was driven by temporary hiring for the once-a-decade census.
For now, refinancing represents two-thirds of all mortgage activity, and lenders report some signs of life on that front.
"I've had at least 40 messages from people today," Brad Cohen of Mason Dixon Funding said Thursday. "They're all hearing about the record low rates and they want to refinance."
But refinancing activity is about half of what it was during the frenzy of early 2009, when the Federal Reserve committed to buying a huge chunk of mortgage-backed securities and mortgage rates immediately dropped below 6 percent.
Since then, however, refinancing has petered out. Many who could refinance already have. Some borrowers are unable to refinance because the value of their homes has tumbled and their equity has melted away. Others have been shut out because lenders are demanding stellar credit or hefty down payments.