Never before, in the history of the housing market, have two of most important economic variables converge to present the perfect buying scenario for homebuyers. First, the average 30-year fixed rate mortgage is at the lowest level in history - 3.91 percent. The 15-year mortgage is around 3.21 percent.
The average mortgage rate for 30-year fixed rates mortgage has teetered around 4.5 percent since the end of the second quarter—two percentage points lower compared to 2008, when rates topped 6.5 percent.
Second, home prices teeter at the lowest price levels since 2008. On average, home values have declined about 31 percent. In some areas of the country like Phoenix, Las Vegas and Miami, prices have declined as much as 60 percent off the peak prices.
Factors that Affect Buying or Refinancing Decisions
Low home prices and interest rates have traditionally been a major enticement for buyers to jump into the market. In the past, low interest rates alone would have motivated millions of Americans to refinance their home.
Nonetheless, home sales and mortgage refinancing have remained stagnant for the past few years. Unemployed Americans, high down payment requirements, tighter credit standards and lack of equity have combined to decimate the U.S. housing market and the general economy.
High unemployment - The national employment rate for the end of November sat at 8.6 percent. In 2008, 2.6 million American lost their job—the single largest loss of employment in one year since 1945. Over 13.9 million Americans are looking for work, 8.5 million people work part-time, but want full-time employment.
High down payments – In June 2011, the National Foundation for Credit Counseling (NFCC) surveyed 2,000 people. The NFCC found that almost 50 percent of the respondents believe they did not have the necessary resources to save 20 percent for a down payment on a home.
In March, the CEO of the National Community Reinvestment Coalition, John Taylor stated, “If we require 20 percent down payments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”
Higher credit scores – The Associated Press evaluation of FICO and other credit-score metrics revealed about 60 percent of Americans do not have credit scores above 700, which many lenders require to qualify for the best mortgage rates. The average American has a FICO score of 661.
Higher refinance costs – Refinancing a mortgage requires the payment of appraisal fees and closing costs. On average, closing costs for mortgages or refinancing is about one percent of the loan amount. For example, purchasing a home or refinancing for $250,000, expect to pay closing costs of about $2,500.
Inflation and the Housing Market
Another factor that plays a key role in the housing market is inflation. The U.S. economy has been slow to gain momentum, which has kept inflation in check and interest rates low. Conversely, escalating inflation can send interest rates and home prices higher. In November, the U.S. economy had an inflation rate of 3.4 percent.
Key Economic Indicators Pointing Up
Some of the most watched economic indicators show positive signs for the economy. Despite the housing market’s drag on the economy, in recent months the demand for housing has begun to show some semblance of life, with sales volume trending up. Last quarter, the gross domestic product (GDP) grew at a 1.8 percent rate, from the second quarter to third quarter – the strongest rate of economic growth for the year. The growth rates for the first and second quarters came in at 0.4 and 1.3 percent, respectively.
Most economists believe that in a healthy environment, the economy grows at a 2-3 percent rate. Normally, the housing sector contributes about ten percent to economic growth.
In addition, for the fifth consecutive month, the economy has created 100,000 or more jobs, which has not happened since 2006. In November, unemployment also dropped to a 2 ½-year low at 8.6 percent. The latest Consumer Price Index topped this good news by increasing to 64.5 versus 55.2 in November.
According to Eric Green, chief economist for TD Securities, "Still, the stronger momentum going into year-end is for real and at face value puts the economy in better position to withstand what is sure to be stronger headwinds to growth in the first half of 2012."
Typically, homeowners required would need at least 20 percent equity (loan-to-value ratio of 80%) in their home as part of the qualification process to refinance their mortgage. However, the plunge in home prices put about 22 percent of homeowners underwater with their mortgages, which prevented them from refinancing.
Now, many of these borrowers can apply to HARP 2.0, introduced in mid-November, which eliminates the 80 percent loan-to-value ratio condition. Borrowers must have mortgages insured or owned by Fannie or Freddie, and they meet the other requirements, they may qualify to refinance through HARP 2.0.
It is difficult for homebuyers or refinancing borrowers to time the market—on the lookout for a bottom in home prices, or holding out for the lowest interest rate. Borrowers who have the financial means may not see a better time to obtain an excellent best combination of low interest rates and home prices. An established pattern of good economic news could eventually send rates higher. Just a ½ percentage point hike in the interest rate could add hundreds of dollars to a monthly mortgage payment.