Declining Mortgage Rates May Perpetuate the Recovery

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With the housing market having rebounded quickly and now maintaining a holding pattern, there’s been some apprehension around whether or not the recovery will be truly sustainable. There’s persistent discussion around whether or not the elevation in property values have been too swift, and if market trends from the past two quarters currently mimic those which preceded the 2008 bubble. Despite the astounding profits major homebuilders reported in 2013, there need be more concrete economic fundamentals for market observers to feel truly secure.

However, according to a new story from USA Today, current mortgage trends spell major positives for housing’s long-term outlook. As the report outlines, the fifteen-year fixed-rate mortgage has reached a record low as of last week. Standing at a mere 2.61%, this represents a remarkably diminished rate of interest and an even lower rate than the 3.12% recorded last year. This dip in mortgage rates is comprehensive beyond the 15-year category, as the consensus average of all mortgage rates are currently maintaining at an exceptional low.

So What Does This All Mean?

The record low in mortgage rates may allow the housing market to sidestep factors that would otherwise confound the recovery. As I’ve noted before, a lack of young homebuyer equity and shaky job prospects remain a looming threat for the housing market. If young professionals are turned away from purchasing new homes due to concern around fiscal complications, then reduced loan interest will help prevent mortgage from becoming financially burdensome. Mortgage rates have been suppressed since not long after the recession broke, and the fact that they’re decreasing to record lows means that new homebuyers are less likely to accrue monetary complications from closing on a first home.

With a bulwark of prospective homeowners now coming to the fold, the nationwide dip in mortgage rates will only help make long-term loan management a safer option. Considering that today’s 20 and 30-somethings are shouldering an enormous volume of student debt, many are hesitant to assume responsibility for a second loan. Health in the housing sector, let alone the American economy as a whole, will be defined by the financial security of the current generation of young adults. Diminished mortgage rates will brighten the financial prospects for the generation who will soon become the strongest contributors to the U.S. economy.

To unearth what’s often a clichéd phrase, keeping mortgage rates minimal functions as a variety of investment in the future. It will likely be a major step towards preventing both loan default and purchase rate stagnation, and will serve to help maintain current trends in the housing market. Considering the speculation that elevation in property values and increased sales rate are partially being orchestrated by hedge funds, low mortgage rates will help more ‘organic’ market activity like individual home purchases persist unimpeded. And if plans to make credit more accessible come to pass, then reduced interest rates will make these new measures all the safer.

Photo: Great Valley Center

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

6 Comments

  1. At last years Biggerpockets conference Bruce Norris showed an interesting graph in relation to mortgage rates. When mortgage rates went up, housing prices went up. Its counter intuitive. The theory was that rising interest rates created a feeding frenzy among buyers trying to purchase before rates went up again. The graph really took the whole room by surprise.

    Jason

  2. You hit the nail on the head when you said that the younger generation is scared to take out a housing loan with student debt lingering; my first home was about 30% less than the price of a 4 year education. It really has spiraled out of control and it certainly adds to what people refer to as the “housing crisis”.

  3. Agreed but I am really concerned that there are still such a large number of little to no down loans being made. My agent regularly tells me of otherwise good deals being broken because the buyer simply doesn’t have another penny to put towards closing, or other costs. This concerns me since 1) how are these people financially able to adequately care for their home in the inevitable event of a necessary repair?; and 2) there is little incentive for these owners to not walk away from their homes if times get rough. I don’t believe everyone inherently deserves to own the home of their dreams. Yes, everyone should have a safe, comfortable place to live. But, one must live within one’s means. I believe this is better for the owner, the property, and the neighborhoods.

  4. I appreciate your thoughts Harrison. I am more concerned that the low interests rates are a reflection of the fed’s monetary policy of quantatative easing and printing money to keep interests rates low which in the end might really hurt us alot more than the economic crisis we just went through. If we continue to increase our debt by printing money, causing Moody’s and other rating companies to further downgrade the U.S. credit rating, China and the rest of the world might call in their line of credit on the U.S. I actually think there is a good chance this could happen even though our Fed doesn’t think so, and this would be catastrophic and no amount of printing money or keeping mortgage rates low is going to help us then.

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