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Mortgage rates drop

Mortgage Rates Continue to Fall, Leading to More Home Sales

“The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding."

By Anthony SanFilippo
June 2019

Mortgage rates at the end of May dipped below four percent for the first time in 16 months and have now dropped a full percentage point since November, according to data from Freddie Mac.

Pending home sales and new home sales were declining for a while which led to mortgage rates continuing to fall.
However, consumers finally identified a window of opportunity and decided to take it.

According to data released by the National Association of REALTORS® (NAR), existing home sales increased by 2.5 percent in May when compared to April.

Annually, home sales are still down 1.1 percent from this point in 2018, however homebuyers took advantage of the reduced mortgage rates.

“The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding,” said NAR chief economist Lawrence Yun.

Trade Wars

One of the reasons they are falling is the ongoing trade wars between the U.S. and China, among other countries.

Whiles farmers and U.S. manufacturers have suffered because of tariffs, mortgage rates have gone down, proving to be a benefit for those looking to buy a home.

The overall results aren’t there yet, as home sales still lag annually, but usually the impact of something like low mortgage rates happens down the line – and the rates have been falling for months and the month of May appeared to be the tipping point in favor of buyers.

However, despite the increase in existing home sales in May, the uncertainty of trade and tariffs might not lead to the huge rush of buyers that such low mortgage rates would otherwise indicate.

“It’s the residual effect that you are seeing coming from last year’s interest rate increases,” Marcus & Millichap CEO Hessam Nadji told Yahoo Finance. “We had a very aggressive Fed, interest rates were going up, and the housing market slowed substantially because of that. This year we’re seeing interest rates come down, but also the recession fears have heightened, there’s a lot of volatility regarding trade and a lot of noise in the market, so the buyers aren’t moving back in in droves.

“Also, there’s been a preference to rent, throughout this expansion. We’ve seen consumers choose to stay in rental homes a lot longer than they typically would before buying their first home. We’ve seen older adults and couples – empty nesters – come into the rental market and sell their homes. So, the demographics are shifting and the preference to rent is pretty profound around the country.”

Mortgage Rates

The average rate on 30-year fixed-rate mortgages dipped to 3.99% at the end of May which is quite a bargain for homebuyers.

In May of 2018, the average rate of a 30-year fixed-rate mortgage was 4.56%. This means that in the span of a year, the monthly mortgage payment dropped by about $59 per month from about $1,013 to about $954.

“The month of May ushered in the home sales upswing that we had been expecting,” said NAR President John Smaby. “Sales are strengthening in all regions while we see price appreciation for recent buyers.”

Still, it’s not tempting enough to attract an influx of borrowers, as the Mortgage Bankers association reported that the number of mortgage applications dropped 3.3 percent from the third week in May (when the mortgage rate was 4.09 percent) to the final week in May when it reached the 16-month low. Overall, applications for loans to buy homes dipped 1 percent, while loan refinancing plummeted 6 percent.

“The real estate market is very connected with the broader economy,” Nadji said. “So, if the worst-case scenario were to play out and we were to enter an all-out trade war, that would be terrible for the global economy, that would be terrible for the U.S. economy, and real estate is not immune from that.

“I would expect that is not going to happen, because nobody wins a trade war in the end, and I think everyone knows that. So, if you then play out the current scenario, with job growth still about 200,000 to 250,000 a month, where demand is being created … lower interest rates, really help lubricate the marketplace.”


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