Rates Drop Again

By: Martin Santiago

THE resilience of the housing market continues as mortgage rates hit another all-time low, giving potential buyers more purchasing power and strengthening demand. We expect rates to stay low and continue to propel the purchase market forward. However, the main barrier to rising demand remains the lack of inventory, especially for entry-level homes.

Mortgage application volume rose a significant 6.8% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. This after they pulled back slightly the week before. Mortgage applications to refinance a home loan, which are most rate sensitive, jumped 9% for the week and were 47% higher than the same week one year ago.

The annual comparison, while still strong, has been shrinking dramatically over the last several weeks. While this was still positive news for the purchase market, the gradual slowdown in the improvement in the job market and tight housing inventory remain a concern for the coming months, even as low mortgage rates continue to provide support. Home sales surged and beat expectations; homebuilders reported buyer traffic was, well, through the roof, and online housing-related searches soared.

The growing trend of urban flight is also showing up in searches. Interest in the term “suburbs” hit an all-time high in July, not just in the U.S., but worldwide. U.S. cities with the highest search interest in “suburbs” in the past three months were Chicago, Philadelphia, New York, Los Angeles and Houston.

While San Francisco didn’t make the top five, the outflow from the city has already caused a massive drop in rental occupancy and rent prices. The trajectory of this housing recovery is still dependent on government relief to both the housing market specifically and the economy generally. Some predict interest in housing will slow down after this initial surge, and while that trend has shown up in sentiment numbers, it has so far not shown up in home sales, prices, nor in consumer curiosity in just about every aspect of the market.

Mortgage originators take some risk. Although they will sell the mortgages, so a default down the road isn’t a big problem, there’s always a chance that something goes wrong between making the loan and reselling it. Originators may also find that mortgage rates have changed from when they made their commitment to the borrower. And the longer the mortgage process takes, the greater the risk. With huge increases in volume, processing times were sure to lengthen.

Mortgage originators pushed up their spreads both to compensate for their higher risk and because they couldn’t handle all the volume coming at them. Spreads have fallen in recent weeks, helping homebuyers as well as refinancing homeowners. Banks and mortgage companies have succeeded in gearing up their operations for higher volumes and are now willing to accept lower profit margins to fill their pipelines. They should be able to work through the backlog of would-be customers.

Jumbo mortgage rates have dropped a lot in the last month, probably thanks to better economic news. Most jumbos are held by banks because they are not guaranteed by Fannie Mae or Freddie Mac. The lender worries about credit risk: will the recession prevent the borrower from being able to make payments? Conventional mortgages are risk-free so long as they conform to agency guidelines, but that’s not the case for Jumbos.

Look for jumbo rates to decline gradually as the economic outlook improves.

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Martin Santiago is a broker associate at Compass Burlingame, a full-service residential brokerage firm. He is also a licensed mortgage loan originator & an International Associate at the American Institute of Architects. The information presented in this article is for general information only and is not, nor intended to be a formal legal advice nor the formation of a broker-client relationship. Call or email Martin at (415)850-7704; teammsquare@gmail.com; www.teammsquare.com.

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