Many first-time home buyers are intent on getting the best deal possible - not a bad strategy at all. But many buyers forget that "the best deal" depends both on house price and mortgage rate (unless you're one of the lucky few who intend to pay all cash). Remember this handy little equation: For every increase of 1 percentage point in mortgage rate you can afford 9% less in home price. Let's do the math: Say you're shopping for a $500,000 house in South Orange, NJ today but you feel that if you wait another 6 months the price might drop and you'll be able to get this same house for $475,000. But what if in this same time period rates go from 4.75% to 5.75%? Now you can only afford a $455,000 house so that $500,000 house that you thought would drop to $475,000 is now beyond your budget. Bummer! Although my crystal ball is in the shop at the moment, I would bet that interest rates will go up before home prices come down a whole lot.
The Washington Post reports that rates for a 30-year, 20%-down fixed-rate mortgage are the lowest they have ever been since Freddie Mac started following rate changes in 1971. As of last Friday, 6/25, the average rate is 4.69%, down from 4.75% the week before and more than 5% a year ago. Rates for a 15-year, fixed-rate mortgage have gone even lower, as low as 3.875% (compared to 4.89% last year).
The Post explains that mortgage rates are dropping
because investors, nervous about global economic stability and a volatile stock market, are plowing their money into mortgage securities backed by Fannie Mae and Freddie Mac, assets that investors perceive to be relatively safe bets.
But despite the great terms, consumers are becoming less and less interested in buying houses and applying for mortgages. The end of the tax credit in April combined with shaky employment and stagnating wages have led to a steep drop in home sales, and a corresponding decrease in mortgage applications. While some people are still in the market to buy a home, the numbers are reduced and the lower mortgage rates are not working to attract those on the fence. Michael Fratantoni, a vice president at the Mortgage Bankers Association, says that consumers at this point are used to fairly low mortgage rates, and do not therefore see the 4.69% rate as a reason to commit to a mortgage if they are not otherwise prepared to.
However, for those who already have mortgages, now is an excellent time to refinance, and indeed, refinancers make up a whopping two-thirds of all mortgage activity. For those who can, refinancing is a great option, but not everyone who wants to will be able to, given that house prices have dropped and their own credit history might not fit the more stringent qualifications mortgage lenders have adopted since the subprime mortgage crisis.