Mortgage rates fell as growing demand for home loans continue to strain lenders’ capacity to process them.
The 15-year fixed-rate average reached 2.36 percent, down from 2.40 percent, with an average 0.7 point. The five-year adjustable-rate average at 2.90 percent, with an average 0.2 point, was unchanged from the previous week. The 15-year rate was 3.14 percent and the five-year was 3.38 percent a year ago.
“Mortgage rates are in a holding pattern because we have lots of big things looming and investors are waiting to see what happens,” said Danielle Hale, chief economist with Realtor.com. “Obviously, they’re waiting on the election results, but also on the next stimulus plan, which seems to start and stall. I expect mortgage rates to stay stable and not go up or down much until we get some of this big news.”
Freddie Mac’s Primary Mortgage Market Survey, from which the averages are derived, is confined to rates on conventional home loans for borrowers who make a 20 percent down payment and have excellent credit. Rates are likely to be higher for borrowers who make a smaller down payment and who have a lower credit score.
The yield on 10-year Treasury notes, Federal Reserve policies, the stock market and other economic indicators as well as the volume of mortgage applications also all play a role in determining rates individual borrowers are offered from week to week.
Pending home sales, which are homes that are under contract but have not yet gone to closing, rose by 24.2 percent in August compared with August 2019, according to the National Association of Realtors. They were also up 8.8 percent compared with July. The buyers of these homes are in the process of finalizing their mortgage loans, which contributes to high loan demand.
At the same time, mortgage applications for the week dropped — not so much from declining demand but from lenders trying to deal with an overwhelming interest from borrowers by curtailing the number of applications they will accept.
Lenders who “have been able to increase business capacity continue to offer more competitive rates than others who have been forced to slow volume with higher, less competitive rate offerings to consumers,” said Paul Buege, president and COO of Inlanta Mortgage in Pewaukee, Wis. “Lenders who have been forced to slow business by offering less competitive rates will usually adjust their refinance price offerings, but not their rates on mortgage loans to purchase a home.”
Because the Federal Reserve intends for at least the next two years to continue buying bundles of mortgages sold to investors called mortgage-backed securities, or MBSs, analysts say they expect home loan rates to remain at near historically low levels for the long term. Still, many lenders advise potential borrowers not to wait.
“The advice offered by most lenders: Act now and take advantage of the historically low rates to finance the purchase of a home or refinance a current mortgage,” Buege said. “Most agree rates will not drop much further, but have a slight chance of increasing. If you have a reason to act, do it now.”
Another possible reason not to wait, according to experts: Rising home prices might offset the savings generated by low mortgage rates.
Borrowers taking out a $400,000 loan at this week’s 2.88 percent would save about $170 per month, or more than $2,000 per year, compared with borrowers taking out that same loan at 3.65 percent, the rate this time last year.
“But keep in mind that a $400,000 loan with a 20 percent down payment would be a $500,000 property, which would look different than a $500,000 property a year ago because prices have risen so dramatically,” Hale said. “If prices are up 10 percent compared to last year, that $500,000 house would have cost $450,000. So, basically, low rates are saving only about $2 or $3 a month and are just offsetting the price increases. Low rates are helpful, but it depends on how long you’ve been shopping for a home whether they help that much.”
In a statement, Sam Khater, Freddie Mac’s chief economist, added: “We’re seeing potential home buyers who now have more purchasing power and many current homeowners who have the option to refinance their loan for a better rate. However, several factors could disrupt this activity, including high home prices, low inventory and lender capacity.”
The inability of lenders to keep up with the crush of demand for home loans is playing out in the weekly Mortgage Bankers Association report. The market composite index, which measures the total volume of applications, dropped 4.8 percent. The purchase index slid 2 percent but was 22 percent higher than a year ago. The refinance index fell 7 percent from a week earlier but was 52 percent higher than a year ago.
“There are indications that refinance rates are not decreasing to the same extent as rates for home purchase loans, and that could explain last week’s decline in refinances," Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement. "Many lenders are still operating at full capacity and working through operational challenges, ultimately limiting the number of applications they are able to accept.”
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