Mortgage rates dipping again

by Jim Buchta of Star Tribune
Published: January 17, 2004
Section: BUSINESS

Al Norby didn't expect mortgage interest rates to ever be lower than they were when he refinanced last summer, and neither did many experts. But with the spring housing market just around the corner, mortgage rates dipped last week, giving Norby an unexpected opportunity to refinance a second time, saving him more than $300 a month.

"Having two young kids, it makes a big difference," said Norby, of Minnetonka. "It provides freedom for us as a family to do even the little things."

With the economy slowly recovering and the stock market on the rise, the prevailing wisdom was that mortgage interest rates would inch upward. Instead, a dour jobs report Jan. 10 caused rates to drop to a 36-year low -- 5.68 percent for a 30-year fixed-rate conventional mortgage, according to Bankrate.com. The result is that people who missed the opportunity to refinance now have a chance, and prospective home buyers may be able to more easily afford new digs.
A momentary blip? Perhaps.

"But procrastinating on your refinancing may have given you a better opportunity than you've had in the past four months," said Keith Gumbinger, vice president of HSH Associates, a mortgage research company in Butler, N.J. "We expected interest rates to increase as the year went on, but that didn't happen."

The decline in rates came in the wake of a weak employment report from the U.S. Department of Labor, saying the nation added only 1,000 jobs in December while thousands had stopped looking for work. Though the stock market had been rising and there was other positive economic news, those lackluster figures made some investors squeamish.

"That [report] cast the economic recovery in a bit of a bad light in the sense that despite all the improvement on all the other fronts the job market continued to languish and has not shown the type of improvement that has been expected," said Greg McBride, senior financial analyst with Bankrate.com, an Internet Web site that tracks mortgage rates nationally. "It was like watching dominoes fall," he said.

Likely to hold

At the same time there's little evidence of any significant inflation -- a signal to the bond market that the Federal Reserve Board is likely to hold shorter-term interest rates in check, said Michael Swanson, vice president and senior economist with Wells Fargo Home Mortgage in Minneapolis. As a result the yield on 10-year Treasury bonds -- the traditional benchmark for mortgage rates -- fell to less than 4 percent last week.

The Federal Home Loan Mortgage Corp. reported a rate of 5.66 percent Friday. Rates vary by lender, and the average of 5.68 percent on Friday's Bankrate.com listing was just slightly above the 41-year low of 5.28 percent, reached in June. A quarter of a percentage point usually is not considered significant, but with rates in the single digits even such a slight change can make a big difference to home buyers and people such as Norby, who bought at a higher rate.

"This is a phenomenally good rate," Swanson said. "Historically speaking, the odds are against you for getting a much better deal."

Consumers seem to be getting the hint.

"It's getting crazy," said Kris Wilson, a senior loan officer with Summit Mortgage in Bloomington. "I expected that we'd be in the 6.5 percent range, which still may happen, but it's not happening right now."

The bulk of the applications coming into Wilson's office during January were for purchases, mostly first-time buyers who are taking advantage of an increase in the number of houses for sale this winter. Some are refinancing, and many are taking advantage of interest-only mortgages, an increasingly popular option for cash-strapped home buyers.

Wilson said that traffic isn't as good as it was during those record days of last summer, when she shepherded mortgages totaling $3.5 million through in June. But already this month she's up to $2 million.

Warming trend

As the spring housing market approaches, the timing couldn't better. Already, the Mortgage Bankers Association is reporting an increase in mortgage applications. For the week ended Jan. 9, loan applications for purchases and refinancings rose 17.1 percent from a week earlier. The purchase-index portion of those numbers increased 11.1 percent (seasonally adjusted), while the refinance index rose 25.1 percent.

The health of the housing market during the rest of the year will depend largely on what happens to interest rates. Swanson predicts that rates will increase in a matter of weeks, not months.
"Odds are that this will be a short-lived phenomenon," he said, noting that if the January jobs report includes good news, rates are likely to rise. "The bond market would take back what it's given you."

Bankrate.com's McBride said rates during the coming months will be determined in large part by the next batch of economic news, so investors will be closely watching the Fed's next meeting Jan. 27 and 28, as well as the January jobs report, which will be released on Feb. 6.

"If we get economic data that refutes those poor job numbers, rates may rebound to where they were a couple weeks ago," McBride said.

That could result in rates that remain between 6.5 and 7 percent for the duration of the year, said HSH's Gumbinger.

"Last year's forecast still holds true for this year," he said. "The economy is building a foundation under itself. And while inflation probably won't be a problem, greater demands for credit by a growing economy would theoretically help lift interest rates."