Decline in Rates Boosts Activity
The steady decline in mortgage interest rates to nearly their lowest levels in 20 years has created a surge in home mortgage refinancing and spurred some reluctant home buyers to jump into the market, lenders and Realtors say.
Despite predictions of an economic contraction in the third and fourth quarters this year, lenders nationwide and locally report record numbers of refinancing applications, including those of borrowers who refinanced earlier this year when rates were about one point higher.
“The refinancing activity we’ve seen in the last three weeks is unprecedented,” said Phil Colling, an economist with the Mortgage Bankers Assn. of America. “The reason is that rates are exceptionally low, and the events of Sept. 11 shocked some of the ‘wait-and-see crowd’ into action.”
The average rate for a 30-year fixed mortgage with one point in Southern California was 6.46% last week, down from last year’s high of 8.6% in mid-May and down from 7.66% a year ago, according to Earl Peattie, president of Mortgage News Co. The Oct. 4 rate of 6.42% nearly matched the 20-year low of 6.4% in October 1998.
“I see interest rates continuing to fall,” Peattie said. “They could go down into the low 6s, or even the high 5s at some point.”
Tom Swanson, Los Angeles County sales manager for Wells Fargo Home Mortgage, said that his region posted a $100-million increase in mortgage loans from August to September of this year. Refinancings represent about 60% of Wells Fargo’s total loan volume.
In the last 25 years, the rate has dipped below 7% only 11 months, Swanson said. “These are the lowest rates I’ve seen in a long, long time.”
Nationally, total mortgage applications are up 338% over last year, according to the MBAA. For the week ending Oct. 12, refinancing applications were up almost 500% from the same week a year earlier.
Borrowers who prefer adjustable-rate mortgages, or ARMs, when interest rates are higher, are avoiding them now, analysts say. ARMs represents only 25% of the current mortgage market in Orange County, for example, compared to a peak of 77.4% in Sept. 1988, said John Karevoll of DataQuick Information Systems.
Real estate agents say that first-time buyers, in particular, are benefiting. Buyers are realizing that lower interest rates allow them to get more home for the dollar, said Syd Leibovitch, a broker at Paramount Properties in Calabasas.
To qualify for a $500,000 loan 10 years ago, a buyer would have had to earn $144,000 annually, the Realtor said. With today’s rates, the buyer of that same house would need to earn only $96,000.
A year ago, when rates were at about 7.66%, a borrower would have locked into monthly payments of $1,420 on a 30-year, fixed-rate loan of $200,000. At today’s 6.46% rate, the monthly payment on the same loan would be $1,264, an 11% drop. That comes to $1,872 a year in savings, or $19,000 over 10 years, according to David Soleymani, senior vice president at First Capital Corp. in Santa Monica.
“People who’ve been sitting on the fence should get off immediately,” Soleymani said. Low interest rates spurred Michael and April Hebert to purchase their Yorba Linda home, which closed escrow about a week ago. The first-time buyers, who hadn’t seriously considered buying right now, moved quickly when the rates started hovering around 7%.
The low interest rate allowed them to qualify for a $210,000 home, a nice bump from the $180,000 home they thought they could afford.
“We figured we’d better buy now,” April Hebert said. The Heberts’ decision to act now is no surprise to James Joseph, owner of Century 21 Grisham-Joseph in Whittier. The longtime agent said that historically, when interest rates dropped, a new pool of buyers jumped into the market, hoping to maximize their purchasing power. Joseph said that although he is not seeing the superheated market of a year ago, most transactions involve two potential buyers bidding on a property.
“Many times, a 1% drop in interest rates can make all the difference, especially for first-time buyers who are stretching,” Joseph said. “Interest-rate reductions have helped neutralize the sticker shock of higher prices, so people are in a buying mood.”
