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Record-low mortgage rates fail to move market

How far must long-term mortgage rates fall before the struggling housing market gets a boost? In the current tough economy, it is not clear that even zero percent would help.
A view of a home for sale in Los Angeles
A view of a home for sale in Los Angeles. Home loan demand climbed last week but record low mortgage rates failed to light a fire in a market constrained by unemployment, tight lending.Mario Anzuoni / Reuters
/ Source: msnbc.com contributor

What’s the magic number? Three? Two? One?

Zero?

How far must long-term mortgage rates tumble before the summer silence filling many residential real estate markets is broken by whispers of a real rebound?

Benjamin Clark has pondered the question. Despite a steady decline this summer that has trimmed the average rate on a 30-year fixed loan to about 4.49 percent – a historic low – home sales and mortgage refinancing activity remain mired in the muck of job uncertainty and underwater loans.

So Clark, head of the National Association of Exclusive Buyer Agents, told his 500 members to name a number. Given the current economic conditions, he asked, what 30-year fixed mortgage rate would “spur significant additional real estate sales?”

Many agents flashed their desperation: About one-third believe the 30-year rate must slink into the 3 percent range to fuel healthy action while about one in 10 agents feels the rate must touch the twos. But most respondents — 42 percent of the agents — said that there is no bargain-basement threshold where the rate “becomes relevant enough” to overcome larger economic worries and entice a fresh tide of transactions. 

Has the almighty mortgage rate – at least for now – lost its power and luster? Does the rate matter anymore?

“Rates alone are not the magic factor” they once were, Clark acknowledged. Based in Salt Lake City, Utah, Clark said he has remained busy this summer with buyers, although his clients are on the hunt not due to shrinking rates: This simply was the right time for them to purchase. Still, he said that if long-term mortgage rates were to trickle into the 3.75, 3.5 or 3.0 percent range, “that would help.”

“But,” Clark added, “I’m all about the zero percent!

“The rates definitely do something. If they were a little higher, the market would be even slower. If they were a little lower, things would be a little better,” Clark said.

To Clark’s point, the volume of mortgage loan applications edged higher in the first week of August, according to the Mortgage Bankers Association’s weekly survey, released Wednesday.

The buying landscape is similarly bleak despite the dwindling rates. During July, monthly purchase applications lapsed by 3 percent from June, according to the MBA. And in June, buyers’ applications declined 15 percent from May. Industry experts pin the current lack of buyer interest on unemployment or lingering worries about losing a paycheck. In Clark’s survey of buyer agents, he asked “What are (the) reasons buyers may put off buying ... in spite of very low interest rates?” The top answer, at 77 percent: “lack of job security.”

Refinancing activity also is sluggish.

"We are not seeing a huge impact from the lower rates in terms of refinancing and this is likely due to borrower burnout," said MBA spokeswoman Carolyn Kemp. "As rates have been historically low for some time now, the pool of borrowers who were eligible to refinance have likely already done so."

“It’s unprecedented” that such a historically low rate has failed to incite buying or refinancing stampedes, said Greg McBride, senior financial analyst for Bankrate.com. “But at the same time it’s not a big surprise. ... I don’t view it as an oddity ... It’s the job market."

“Suffice it to say that you could reduce interest rates to zero – if somebody doesn’t have a job or is nervous about income, they’re not going to plunge into ownership,” McBride said. “It just goes to show you that mortgage rates alone are not going to revive the housing market."

“I wouldn’t go so far to say (they) don’t matter. It’s just one variable. If you combine that one variable with a better outlook in the job market, people will start buying housing.”

At 4.49 percent, the current 30-year fixed rate is the lowest since Freddie Mac began tracking rates in 1971. To find a lower benchmark you would have to go back to the World War II era, when borrowers could obtain shorter-term home loans for about 3 percent.

Real estate blogger and economist Ted C. Jones contends the probability is “moderate to high” that mortgage rates will climb by 1 percent over the next 12 months as the economy improves. Jones, senior vice president of Houston-based Stewart Title Guaranty Co., said U.S. workers already are “crawling off the bottom” of the unemployment floor. And he sees, within the murkiness of the larger economy, “a light at the end of the tunnel – and it’s not another train.”

“I’m not a feel-good economist either," he said.

In 2007 Jones told agents at a real estate seminar: "You’re not going to believe the hurricane that’s going to hit us," he said. “But I am seeing some stable recoveries ... What is the probability of a 10 percent home-price decline over the next year? Low.”

He says federal tax incentives that sparked the spring buying binge reduced some of the overstock of housing inventory. And looking ahead, he cites a predicted U.S. population growth spurt (some 100 million people over the next 40 years) as the engine that will help revive new-home construction.

“So I don’t see rates getting to the three, two or one percent level,” Jones said.

“We have to look at these rates today as the best buying opportunity in some people’s lifetime,” Jones added. “What bothers me, though, is we’re scaring people away (with gloomy economic outlooks) – people who can lock in housing costs for the rest of their lives at rates we may never see again.”