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Historically low mortgage rates prompt increases in applications, those eligible for loan refinancing

September 19, 2019

Mortgage rates experienced a relatively large increase September 13 following a multi-week window that on average, saw historic lows for a 30-year-fixed-rate under 3.6%, prompting recent increases in the number of home sales and mortgage applications, Reuters reported.

Just one week before the recent increase to 3.59%, interest rates on benchmark 30-year loans had dropped to as low as 3.49 in the first week of September, public mortgage lender Freddie Mac confirmed, according to Forbes; the lowest recorded weekly mortgage rate in American history is 3.3%, while the highest in the past 40 years was 18.5% in 1981.

Existing home sales increased by 2.5% in July 2019 compared to June.

When you find a low mortgage rate, don't wait!

In the midst of the lengthy window this summer - reported by Yahoo! Finance to be the first time rates remained consistently under 3.6% for at least 4 weeks since 2016 - experts advised investors and consumers to take advantage of the downward trend, rather than hold out to price shop.

Currently, the rate for a five-year mortgage is higher than that of a 15-year, Freddie Mac statistics show.

While some - including millennials - might have missed the boat, many consumers heeded the advice. Since 30-year rates first dipped down into the 3% range early this summer coming off of what Freddie Mac reported was a 7-year peak of just under 5% in November 2018, existing home sales had increased by 2.5% in July 2019 compared to June, according to the most recent related data from the National Association of Realtors.

For the week of September 1, 2019, mortgage refinancing activity had increased by approximately 169% compared to the same time in 2018, according to the Mortgage Bankers' Association's seasonally adjusted index.

Not only have the lower mortgage rates spurred an increase in consumer home purchases - they also presented the opportunity for tens of millions of Americans to refinance their existing mortgages or loans to reflect the change.

A recent Black Knight report found that as of September, around 11.7 million homeowners could refinance to cut their existing mortgage rates by at least 0.75% - the highest number of U.S. homeowners eligible to do so since 2001.

Following the September 13 rate increases - reported by CNBC to have occurred during the "worst week for mortgage rates" in 3 years - the number of Americans eligible to refinance had dropped by 2 million.

According to MarketWatch, the increase in mortgage applications reported in early August was attributed mainly to those "centered on refinances rather than loans used to purchase homes". A diminished supply of homes currently for sale at the time within consumers' price ranges, MarketWatch reported, would partially offset any growth the housing market incurred result of the loan rate window.

The decline in mortgage rates over the summer has been attributed to the then-growing economic and geopolitical tensions between the U.S. and China.

Trade war, US Treasury bonds and mortgage rates

According to CNBC, U.S. mortgage rates "loosely follow" the trend of the 10-year U.S. treasury bond, among other factors. Global economic confidence is also another factor, according to experts; some have attributed the most recent rate increases to growing optimism in the ongoing trade war with China following a summer of escalation.

Similarly, the decline in mortgage rates over the summer has been chalked up to the then-growing economic and geopolitical tensions between the U.S. and China as a result of the two countries' ongoing trade war. For example, the rate average dropped to below 3.6% first occurred in the week of August 15 following the U.S. Treasury Department's labeling of China as a "currency manipulator" and the Asian nation's announcement that all of its public enterprises would cease the purchase of U.S. agricultural products - both on August 5, according to Reuters.

As of June 2019, China is the second-largest holder of US treasury securities, behind Japan, according to U.S. Treasury Department data.

Though delayed tariffs had gone into effect on September 1, both countries experienced a warming in relations in early September that some experts - including Matthew Speakman, a Zillow economist - argued had resulted in tariff reductions and exemptions that in turn drove up mortgage rates again. By mid-September, the average on a 30-year fixed-rate mortgage had risen to 3.56%.

"Optimism that recent signs of progress will result in the abandonment of proposed tariffs, due to be imposed October 1, pushed bond yields higher, and mortgage rates followed," Speakman said in a September 12 Washington Post article.

In response to the low rate window, President Donald Trump on September 11 expressed his desire for the Federal Reserve to take mortgage rates into "the negative," (in Denmark, for example, homeowners are essentially "paid" to take out 10-year loans, according to Bloomberg) yet rates rose shortly afterward. The Federal Reserve had previously expressed its desire to cut mortgage rates earlier in the year.

An August 28 Forbes op-ed providing advice to consumers regarding how they could effectively take advantage of the low rate market at the time argued that another "material" decrease in interest rates would "likely be because a recession is imminent" or is "already weighing on the economy in the minds of traders and finance professionals."

"So, if we get another shock to the economy...that causes rates to drop again that could be ominous for asset prices. In other words, another big drop in rates could make banks reassess their home or property price assumptions," author Joshua Pollard argued in the piece.




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