San Jose mortgage loan broker, Andrew Soss reports that he’s seen a significant jump in loan applications since the beginning of 2012.
"We've had a huge increase," he said. "I'd say over the month, we've had a 40% increase in applications."
Soss isn’t the only lender reporting a huge jump. CoreLogic’s MarketPulse report released on January 18, indicated that 2012 could be the year the housing market finally starts to rebound. Some factors influencing predictions include improved unemployment figures, low mortgage rates and the rash of affordable homes.
Signs of life are everywhere. The Mortgage Bankers Association say that loan applications rose 23% last week and refinance activity swelled to 26.4% the week ending January 13.
The MBA says that this is the highest level since early August, as applications for new mortgages increased by 10.3% week over week.
With rates sinking to historical lows the housing industry appears to be slowly recovering. Freddie Mac reports that rates for a 30-year mortgage loan dropped to 3.89% and a 15-year loan to 3.16% last week.
Of overall home loan activity, 82.2% of all applications were dedicated to refinances versus new purchases. Homeowners are seeing how they can save a considerable amount of money through refinance. For instance, a $400,000 mortgage refinanced today at 3.89% would be $263 a month less than with a loan at 5%, which is where rates were in May 2010.
Homeowner Dede George and her husband said that they have refinanced their San Jose home numerous times since they bought it 10 years ago. During the latest wave of rate reductions, they’ll be able to lower their payments by $200 a month.
ARM Borrowers Benefit From Low Rates
In addition to those who locked into a traditional mortgage product several months ago, adjustable rate mortgage (ARM) borrowers are also seeing tremendous benefits from low rates. In a low rate environment, ARM borrowers enjoy a considerably lower payment structure, however once the loan resets the result could be financially crushing if rates were high. Luckily, ARM borrowers are saving money instead of losing it.
Keith Gumbinger of HSH Associates said that while an ARM is not for the faint of heart, it is a great product for those who aren’t afraid of a little risk. "For anyone with the guts to hang on, ARM borrowing has been very favorable," he said. "If you took the risk, you could be enjoying the results right now." Currently rates on ARMs range between 2.7% to 3.6%.
Doug Duncan, chief economist for Fannie Mae says that the reason the market is flooded with more refinance applications (versus purchase) is because falling rates have more of an influence on refinance activity than new home purchases. "[Home] sales are a lot less interest-rate sensitive than people think," Duncan said.
New Purchase Numbers are Looking Up
Although economists contend that lower rates may have little influence on the new home buying market, some lenders and Realtors are still seeing a hike in buyers. For example, a California Association of Realtors survey shows that first-time homebuyers increased from making up 19% of the state's housing market in 2008 to 43% in 2011.
Barbara Lymberis, president of the Santa Clara County Association of Realtors says that business is booming. We're seeing many, many more first-time buyers getting into the market," she said. "The phones are ringing off the hook."
Even new home builders are optimistic about the future as the National Association of Home Builders/Wells Fargo builder sentiment index increased four points to 25 in January-- the highest level since June 2007.
Although any reading below 50 points indicates a down housing market, builders say that they are beginning to see the market turn around. NAHB Chief Economist David Crowe said, "Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets," he said.
"That said, caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market."
While buyers and builders are optimistic, sellers who have been beaten down by the market still aren’t buying the possible market turnaround. Only 7.6% of sellers believe that now is a good time to sell, which is not off base as CoreLogic reports that home prices dropped 4.3% year-over-year in November.
Experts Warn Borrowers to “Get In While the Getting’s Good”
Amid the good news is a word of caution. Rising fees and possibly higher rates may begin to eek into the market over the next few months. Congress recently decided to boost fees for Fannie Mae and Freddie Mac backed loans as a way to cover the extension for payroll tax cuts, which means higher upfront costs for borrowers at half a point starting in early April.
Currently, borrowers pay approximately 0.7% of the mortgage balance for a 30-year and 0.8% for a 15-year mortgage. This works out around $700 or $800 for every $100,000 borrowed. The new fee would add $500 for every $100,000 in principal.
Gumbinger says that what will most likely happen is the fee will present itself to borrowers in the form of higher rates, most likely an extra one-eighth of a point to the rate.