With the Federal Reserve buying billions of dollars worth of
mortgage-backed securities, you might think that mortgage rates are
poised to fall even lower than the current rock-bottom levels. Maybe you
should wait on that refinancing, you wonder, or delay purchasing a
house until the market is even more favorable.
Not so fast. The Fed’s purchase program certainly is expected to keep
rates low for some time, but there’s no reason to think rates will fall
much further, according to economists. In fact, looking at the past two
Fed bond-buying programs, the market felt a stronger impact in the weeks
immediately following the announcement – less so as time went by.
That’s not to say that the Fed’s actions are immaterial to current and
potential homeowners. Three key factors that affect housing values and
mortgage rates include why the Fed decided to act, current real estate
market conditions and what the future could hold, both for the level of
rates and the capacity of the financial system to handle demand for
mortgage applications.
“The Fed wanted to give as much juice as possible to a piece of the
economy that was starting to show some life,” said Liz Ann Sonders,
chief investment strategist for San Francisco-based Charles Schwab &
Co. “What is more important is the turn we’ve seen in prices.”
A nudge for housing investment
On Sept. 13, Fed Chairman Ben S. Bernanke announced that each month the
Fed would buy as much as $40 billion of mortgage bonds to support the
market and boost the economy, as well as $45 billion of Treasury
securities. The central bank also promised to keep interest rates low
through mid-2015, regardless of signs of economic recovery. That caused
mortgage rates to fall to historic low levels.
“The Fed is saying, ‘We stand ready to do what we have to do to keep
long-term rates down,’” said Bob Walters, chief economist at Quicken
Loans in Detroit.
Investors face a long stretch ahead of low returns from such traditional
financial instruments as bank deposits and bonds. The Fed’s hope is
that they’ll be pushed into buying real estate and that this will
further lift home prices, said Joseph Kalish, chief global macro
strategist for Ned Davis Research, based in Venice, Fla.
“You’re really coercing investors who are holding cash to get into
something else,” Kalish said. “What Bernanke is hoping for is that some
of that money ends up in real estate. … People are fed up with earning
zero percent at the bank. They’re buying up these foreclosed
properties.”
About 11 million U.S. homeowners owe more on their mortgages than the
home is worth, known as being “underwater.” For every 5 percent increase
in home prices, another 2 million properties rise “above water.” So
policymakers can be most effective in helping homeowners if they’re able
to encourage prices to climb, Kalish said.
The CoreLogic Home Price Index is up 2.5 percent from a year ago and the
Federal Housing Finance Agency’s purchase-only index reached its
highest level in nearly two years, after growing 3.7 percent from last
year – the fastest pace since September 2006, according to Kalish.
Prices start to rebound
Indeed, the factor of home prices is key in understanding the Fed’s
action. As much as the Fed has done to keep rates low during the past
few years, it couldn’t overcome the fact that home prices were falling
at double-digit rates. Now that National Association of Realtors data
show home prices beginning to appreciate again, by as much as 10
percent, it’s finally profitable to buy a house again, Sonders said.
“That is why housing is really starting to ramp,” she said. “Stocks and
homes are the two biggest components of net worth, and they both are
firing.”
The Fed wanted to jump on the momentum of this new energy for the
economy, in hopes of building on the new confidence that will need to
continue if unemployment is to fall and healthy growth is to be
restored. Residential investment has contributed to economic growth in
each of the past five quarters, after six years of the economy getting
little or nothing from housing, Kalish said.
“We think the housing market has hit bottom in terms of activity and
pricing, and we’re looking for these trends to continue for several
years,” he said. “It’s about even between buyers and sellers; nobody has
an advantage. This tighter market is helping to drive up prices. You
hear (real estate agents) talking about a shortage of supply, even in
Florida.”
As prices rise and more homeowners have positive equity, it could make
it easier for banks to loosen credit standards and solve some of the
problems borrowers have had with credit approval, too-low appraisals and
difficulty with short sales, Walters said.
“A rising housing market starts to heal a lot of those things,” he said.
“We’re seeing pretty significant evidence that housing has bottomed and
is doing better than ever. It’s going to start to resolve a lot of the
challenges in the marketplace.”
A refinancing backlog
Already, the Fed’s bond purchase program has boosted the number of
refinancing applications to the highest level since April 2009, adding
to an existing backlog. For homeowners who have been waiting months for a
refinancing to process, that delay is unlikely to change substantially
until after the election. There’s simply too much undecided about
federal mortgage policy and the future of the budget and deficit debate,
Kalish said.
“The banks can see this increase in demand, and it may warrant some
additional hiring, but they’re really reluctant to staff back up.
They’re under tremendous pressure with leverage and costs,” he said.
“They’re going to be pretty cautious.”
Mortgage lending for home purchases is constrained even more, by a
combination of borrowers’ difficulty obtaining mortgage insurance,
higher servicing costs, more conservative appraisals, smaller lender
staffing and the macroeconomic uncertainty. Even borrowers who obtain a
new mortgage should expect continued lengthy approval timelines,
extensive documentation and higher costs.
“The real estate market is not a quick-fix market. It takes months to
see changes,” Kalish said. “The banks went through a horrific time the
last few years so they don’t want to take another risk with people with
low FICO scores.”
That said, lenders will probably resume hiring in force after a
sustained period of rising prices and solid demand. The Fed’s support
through its mortgage bond-buying program takes a big step in that
direction.
“The Fed has proven it’s going to do what it can, and what it wants is to keep long-term rates down,” Sonders said.
But Sonders, Walters and Kalish cautioned that individual homeowners
shouldn’t procrastinate on refinancing or purchase decisions just
because rates should stay low for some time. Other factors, both
personal finances and life stage, should be given greater weight.
“When rates move, they can move rapidly and they don’t ring a bell when they’re about to move,” Walters said.
Copyright washingtonpost.com. Katherine Reynolds Lewis is a freelance writer.
It’s
great that home prices are rising, but it will provide little relief to
the still-crippled real estate market as we move into 2013. Although some markets are seeing sales gains,
the current environment may not have enough of an effect on potential
buyers as they weigh the pros and cons of investing in a home.
Primarily, will the property’s value increase enough to outweigh any
potential for negative equity?
