New York Times: Mortgage Rates Keeping Market Afloat

According to the New York Times, mortgage interest rates are buoying the nation’s housing market even as experts are debating whether that market has hit bottom.

The recent decline in mortgage rates has been relatively small, and there is still concern that the slump will worsen in the spring when more homes come on the market.

But the rates, real estate and mortgage broker groups say, have still provided a significant boost to their business, which had dropped significantly from 2005, the best year for home sales in history.

The national average for a 30-year fixed-rate mortgage is now 6.04 percent, after peaking at 6.8 percent in late June, according to Bankrate. These rates are averages for what consumers can expect to pay nationally for conventional home loans.

Mortgage applications, while they are some distance from their peak during the housing boom a year ago, surged 30 percent in early December from their summer lows as buyers took advantage of falling prices and low rates to buy homes before the holidays.

Daniel and Marcie Quaroni were part of that surge. The couple agreed to pay $560,000 for a four-bedroom colonial in Waltham, Mass., near Boston; they have a 30-year, fixed-rate mortgage at a rate of 5.88 percent.

The young couple had fruitlessly searched for a house in the summer only to realize they could not afford to buy the kind of home they wanted.

However, they now find they have enough money left over to spend nearly $15,000 on improvements like a new air-conditioner, gas stove, granite tile and a new coat of paint.

“You’re talking about a couple of hundred dollars a month. That definitely impacts the bottom line. It’s basically like we’re getting free heat, in savings with lower rates,” said Mr. Quaroni.

For their cheaper mortgage loans, the Quaronis and other home buyers can thank bond investors, including Asian central banks and hedge funds, who have been lending billions of dollars to the federal government.

Mortgage rates are closely tied to the yield on the 10-year Treasury note. After a bout of inflation worries pushed it above 5 percent last summer, the yield on the 10-year note fell to as low as 4.424 percent last month amid hopes that the Federal Reserve would cut rates this year.

“It’s low long-term interest rates that are helping to provide the safety net for housing,” said Delores A. Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California.

Yesterday, however, the vice chairman of the Federal Reserve, Donald L. Kohn, dispelled some of the hopes for a rate cut by saying that inflation remained a worry even as lower energy prices help reduce its threat.

“Despite the recent favorable price data, I believe it is still too early to relax our concerns about whether the run-up in price pressures in the spring and summer of last year is truly unwinding,” he said at a speech before the Atlanta Rotary Club.

There are some who are skeptical about a soft landing for housing, noting that sales are still far lower than a year ago and that the current inventory on the market will take more than seven months to sell off. They note that many sellers took their homes off the market late last year after being unable to sell at their desired price.

Many of those properties could flood back on the market in the spring, which is the busiest part of the sales year.

While still low, yields and mortgage interest rates have been inching back up of late. Since early December, for instance, the yield on the 10-year Treasury has risen from 4.42 percent to 4.65 percent yesterday, after recent reports suggested that the economy was growing faster than earlier thought.

The rate on the 30-year conventional mortgage climbed back to 6.04 percent, from 5.8 percent. And mortgage applications have fallen since peaking in early December, though at least some of that is probably a function of a seasonal slowdown during the holidays.

Still, a sustained climb in interest rates could reduce the number of home mortgage applications and hit some parts of the housing market harder than others. The East and West Coasts and the Southwest remain vulnerable because a surge of new construction has left them with a big inventory of homes for sale.

If rates “keep going down, it will help,” said W. Scott Simon, a managing director at Pimco Advisors. “But it postpones the inevitable. You still have massive amounts of inventory on the market.”