By: Jim Offner
June 27, 2010
WATERLOO -- Interest rates are falling to hitherto-unseen lows, thanks to a persistently volatile stock market and the ongoing debt crisis in Europe.
In fact, rates fell last week to their lowest level on record, fueling consumer incentives to lock in low payments for home purchases and refinanced loans.
The average rate for 30-year fixed loans sank to 4.69 percent, from 4.75 percent last week, mortgage company Freddie Mac said Thursday.
That's an all-time low for rates Freddie Mac has tracked since 1971. It beat a record of 4.71 percent set in December. Rates for 15-year and five-year mortgages also are plunging, which, according to bankers, are creating a rare opportunity for mortgage-free homeownership to many homeowners who would remain under long-term loans under different circumstances.
Mortgage rates have plunged over the past two months, according to various media reports, as nervous investors have shifted money into the safety of Treasury bonds. The demand for bonds has caused their yields to fall, experts say, adding that mortgage rates tend to track the yields on long-term bonds.
Whether floor-level interest rates at or near the 4 percent level provides a jolt of energy to housing sales, they say, remains to be seen.
One thing seems certain: Predictions made earlier this year about rising interest rates likely won't come true for the rest of the year, banking experts say.
"I suspect the bond market has figured out as long as unemployment is between 9 and 10 percent, you're not going to see much movement in rates." said Charlie Funk, chief executive officer of Iowa City-based MidWestOne Bank, which operates primarily in eastern Iowa, including the Cedar Valley.
Europe's ongoing troubles are fueling the low rates, Funk said.
"I think when you look at our mortgage rates, they're being driven in large part by our treasury bonds," he said. "Despite our large deficit, we're still perceived as a safe haven. All the European nations have dropped a notch. There's been plenty of demand for our securities."
Federal Reserve policymakers met for two days last week under an acknowledged cloud of caution for the recovery. They, like Funk, were citing Europe's debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment as a reason the Fed was likely to leave its benchmark bank lending rates at record lows. The Fed's key bank lending rate was between zero and 0.25 percent, a range it has occupied since late 2008.
"I don't think the fed can really lower short-term rates -- it's pretty hard to lower them below zero," Funk said. "I think you've seen some of the European nations' sovereign debt has been downgraded. All that plays into the fact that we're still considered to be a safe haven."
For house hunters, these could be heady times -- if their credit score has survived the tough times of the last couple of years.
In the wake of the housing crisis of 2008-09, in which millions of borrowers lapsed into default and foreclosure, banks toughened lending standards.
The other side of that equation is that mortgage lending rates have stayed low. Government-backed Freddie Mac recently said lenders were offering an average rate of 4.75 percent to borrowers with impeccable credit for a 30-year fixed mortgages.
For 15-year fixed-rate loans, the average was 4.2 percent. MidWestOne was 4.125 on 15 year fixed on June 15.
The lure to prospective homebuyers is palpable, said Steve Tscherter, president and CEO, Lincoln Savings Bank, Reinbeck.
"It's going to prolong what's already been a pretty buyer-friendly market," he said. "You have flat price insulation and low interest rates, and that bodes well."
There is an equity hitch, Tscherter said.
"The key is they need down payment money," he said. "They can go FHA with 3 or 3.5 percent down, but that puts a burden on your cash flow," he said.
Bob Reisinger, executive vice president of the Waterloo-Cedar Falls Board of Realtors, said low interest rates have played a factor in a Cedar Valley housing market that is seasonally active, anyway.
"I think it's definitely one of the reasons they are looking," he said. "We've had the record low rates for a number of years. Every time it goes down, it does seem to perk up the market and get people interested because they can buy more house at lower rates and more people can get qualified."
The local housing market was "pretty active" in April and May, due to government tax credits for first- and second-time homebuyers, which expired at the end of April, Reisinger noted.
"I haven't heard there's a big drop in activity," he said. "We still have a shortage of listings in pretty much all price ranges, and that's also keeping the market more active. They've got to react a little quicker than the normal market.
"But it's definitely a help. Four percent is darn near interest-free."
Greg McBride, senior financial analyst with North Palm Beach, Fla.-based Bankrate.com, noted an increase in refinancing activity, thanks to the bargain mortgage rates.
"In many parts of the country, a main impediment is lack of equity, when homeowners have less than the home is worth," he said. "But, there's definitely a window of opportunity for refinancing."
His best advice for would-be borrowers? Don't delay.
"Strike quickly; rates can move suddenly," he said. "Even though I don't expect that to happen, the fact is any sudden move in mortgage rates can quickly erode the benefit of refinancing for many homeowners."