Mortgage rates have fallen close to their lowest levels in nearly a year, but housing demand hasn’t budged much yet.
Freddie Mac reported Thursday that the average 30-year, fixed-rate mortgage rose to 4.14% this week, up from 4.12% last week but down from 4.4% just two months ago. This puts rates at roughly the same level seen in late October 2013 and again last June, when rates were zipping up as investors braced for an end to the Federal Reserve’s bond-buying programs.
But even with low rates, mortgage applications have been soft, according to a separate report from the Mortgage Bankers Association, a sign of still muted demand for home loans.
What’s going on?
First, a longer view helps. True, mortgage rates are low—as low as they’ve been in almost 12 months. But in the same way that shoppers may not be lured by “low prices” at a department store that is always advertising a sale, mortgage rates at 4.1% may not be seen as a steal by buyers who lived with rates that were even lower for all of 2012 and the first half of 2013—especially considering that prices have moved higher.
Put differently, which change is more dramatic—a decline in interest rates from 5% to 3.5% over the two years beginning in February 2011 or the decline from 4.5% in January to 4.1% in May?
Given the time it takes for home purchases to come together and the fact that the decision to purchase a home isn’t purely rate-driven—buyers also must weigh what’s for sale, their family and job situation, etc.—it could take a while to see what effect, if any, the recent drop in interest rates has had on demand.
So do rates really matter? At the margins, yes. They’re a key component of a borrower’s monthly payment. And often the first conversation between a real-estate agent and a potential buyer—”How much are you willing to spend?”—can be influenced quite a bit by mortgage rates, provided the buyer isn’t paying entirely in cash.
What does this payment picture look like right now? The monthly payment on the median-priced U.S. home fell from $673 in February 2011 to $552 in September 2012 as interest rates fell. Interest rates stayed low through May 2013, but the average payment rose to $586 as home prices ticked up. (These calculations assume a 20% down payment on the national median home value as calculated by Zillow).
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed
“Fewer properties for sale with such remarkably low interest rates make it a great time to sell but a more difficult time to buy”