Home buyers and families planning to refinance this autumn had better buckle their seat belts, because the housing market may be in for a bumpy ride.
While home-loan interest rates are sinking to bargain levels, analysts say the U.S. economy could be on the verge of a recession—the first down turn in more than a decade.
On August 15th, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year fixed rate home loan interest rates were hovering at 3.60%, unchanged from a week earlier.
Following the Federal Reserve’s move to lower rates on July 31st, the key 10-year Treasury bond rate—a driver of long-term home-loan rates—has continued to fall from 1.71% to a rock bottom 1.52% on August 16th.
For the first time since the run-up to the Great Recession, yields on short-term U.S. bonds eclipsed those of long-term bonds. Experts say this means that investors are losing confidence in the outlook for the economy and rushing to buy longer-term bonds. So, the federal government is paying a higher interest rate to attract investors of its short-term bonds than its long-term bonds.
Meanwhile, benchmark 30-year fixed home loans plummeted to an average of 3.6% on August 8th, down from 3.75% a week earlier, reported Freddie Mac. On August 16th, Chicago lenders were charging a range of 3.555% to 3.575% on 30-year fixed loans, reported rateSeeker.com. A year ago, 30-year fixed loans averaged 4.53%.
The current benchmark 3.6% rate is the lowest mortgage rates have fallen since November 21, 2012, when they tumbled to a historical rock-bottom of 3.31%, reported Freddie Mac.
So, if you are planning to buy a home or refinance a high-rate mortgage, what’s too worry?
Well, analysts are wringing their hands about the home sales slump in June in Chicago and across Illinois was the worst so far this year. Based on Illinois Realtor data, existing home sales for Illinois (16,579 units), the Chicago Metro area (12,002 units) and the city of Chicago (2,766 units) declined by 11.2%, 11.6% and 13.3% respectively from June of 2018.
Then, there’s the recent stock market slump. The Dow Jones industrial average fell a whopping 800.49 points, or 3% on August 14th, and has lost close to 7% in the past few weeks.
Analysts said the sharp stock market sell-off was caused by a rare development in the bond market, a so-called “inverted yield curve,” that often is a harbinger of a recession. This phenomenon, which points to a lack of investor faith in the economy, has preceded every recession over the past five decades.
“The sound and fury of the financial markets continue to warn of an impending recession however, the silver lining is mortgage demand reached a three-year high last week,” said Sam Khater, Freddie Mac’s chief economist.
“The decline in mortgage rates over the last month is causing a spike in refinancing activity,” Khater said. “Homeowners currently have $2 trillion in conventional mortgage loans that are in the money. This will help support consumer balance sheets and increase household cash flow. On top of that, purchase demand is up 7% from a year ago.”
What does all this high-finance mumbo-jumbo mean to the average home purchaser or the family seeking to refinance?
Experts say the current mortgage rate environment may be fleeting, so would-be buyers and refinancers should move quickly to lock in affordable interest rates before a recession strikes. And, ask your lender for a “float-down” option in case the Federal Reserve Board lowers rates further at its next meeting in September.
History lesson on home-loan rates
Just how affordable is a 3.6% or lower mortgage rate? Twenty years ago—in August of 1999—when many of today’s Millennial borrowers were in grammar school, lenders were quoting 8.15% on a 30-year fixed mortgage.
However, to really appreciate today’s historically low interest rates, housing experts say home buyers need only to look at what banks and mortgage lenders where charging more than three decades ago, in the early 1980s.
According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45% in October of 1981 during the Great Recession of the 1980s. Rates fell below 10% in April of 1986, and then bounced in the 9%-to-10% range during the balance of the 1980s.
Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were relatively affordable five decades ago at 5.81% to 5.94% between 1963 and 1965.
In 1966 and 1967, borrowers paid an average of 6.3% to 6.4% In the 1960s, rates last dipped below 6.5% in January of 1968, when the national average hit 6.41%. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6%-to-9% range.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.