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Did you miss the refinancing boat?

After hitting their lowest levels in 45 years, mortgage rates have risen sharply in recent weeks, threatening to end the latest wave of refinancing activity.
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After hitting their lowest levels in 45 years, mortgage rates have risen sharply in recent weeks, threatening to end a wave of refinancing activity that has been a welcome source of strength for the struggling economy.

More than $3 trillion in mortgages has been refinanced since the end of 2000, roughly the same amount of business that was done in the entire decade of the 1990s, according to the Mortgage Bankers Association. Final figures are not yet in for the just-ended second quarter, but based on preliminary data it appears the industry will post yet another record.

And no wonder: Rates on 30-year fixed-rate mortgages dropped from nearly 6 percent in late March to under 5.25 percent in mid-June, levels last seen in the Eisenhower administration, according to industry veterans.

Since the Federal Reserve’s decision last month to cut short-term rates by only a quarter-point, mortgage rates have climbed quickly as a long rally in Treasury bonds has come to a shrieking halt. Mortgage rates are linked closely to the Treasury market, and the average 30-year mortgage already is back above 5.5 percent, according to the weekly survey from mortgage financing giant Freddie Mac.

“I do believe rates have passed the bottom,” said Douglas Duncan, chief economist for the mortgage bankers group.

Many analysts and industry executives agree.

“I think there is a good chance that we have seen the bottom,” said Sung Won Sohn, chief economist for Wells Fargo. He predicted 30-year mortgage rates could approach 7 percent at this time next year, still relatively low by historical standards but well above the levels that have buoyed the housing market and sparked three major spikes in refinancing activity since late 2001.

“I think we are in the process of the bursting of the bond bubble,” he said. “My advice to people would be if you haven’t refinanced or bought a house — the sooner the better.”

Mortgage rates fell sharply in May and June after Federal Reserve Chairman Alan Greenspan and his fellow central bankers warned of the possibility of deflation, considered a remote but potentially devastating phenomenon that could be hard to reverse. Because of the concern about deflation, traders expect the Fed to keep short-term rates at their current historically low levels well into 2004 and possibly beyond. But with the economy expected to rebound substantially in the second half of 2003 after three years of weakness, Sohn and others believe the bond market overreacted to the Fed’s concern and sent rates too low.

Rares are still ‘pretty darn good'
James B. Nutter Jr., chief executive of a family-owned mortgage lender that bears his name, said homeowners and buyers were quick to snap up what appeared to be a once-in-a-lifetime chance.

“Homeowners are very smart,” said Nutter, who is based in Kansas City, Mo. “They know if the market goes down that quick based on a statement — not on actual facts — it could easily move the other way. So there was a big round of people jumping on 45-year historic low interest rates.”

He said rates are still “pretty darn good” but agrees that the bottom likely has passed.

This is not the first time experts have called the bottom in interest rates, and not everyone agrees.

Peter McTeague, a Treasury strategist at Greenwich Capital, said he expects rates to go even lower this year because the economy once again will fail to fulfill expectations.

Mary Ann Hurley, a bond trader at D.A. Davidson Co. in Seattle, agreed.

“I am concerned that the rebound people are looking for in consumer spending in the third quarter may not materialize to the extent the market is expecting just because there is not a lot of pent-up demand, and consumers have a lot of debt,” she said. And with factories running at only 75 percent of capacity, there is little reason to expect a huge surge in capital spending by businesses, she said.

Most analysts, however, presume the economy will respond to massive economic stimulus from the low interest rates, a $350 billion tax cut and a weak dollar, not to mention the psychological boost from the stock market’s second-quarter surge. That means the latest wave of refinancing could be the last for a while.

Refinancing helps the economy in several ways, but chiefly because most consumers take advantage of their growing home equity to take cash out and use it for renovations or other expenses, such as a new car. If that stream of cash suddenly dries up, the economy will have to find other sources to fuel its growth, such as an expanding job market.

“Frankly that is the biggest concern,” said Sohn. “There can’t be economic growth without job creation. The assumption is we are going to see job growth in the fourth quarter.”

So far, however, there are no signs of it. After last week’s news that the unemployment rate spiked to a nine-year high of 6.4 percent, the Labor Department reported this week that new claims for unemployment benefits rose again, surprising economists who thought they would fall. Weekly claims have come in above the 400,000 level for 21 straight weeks, a level generally consistent with declining overall employment.

McTeague called the labor market “horrific” and said members of Congress who meet with Greenspan next week no doubt will ask him why it is not getting better.