The fear of rising mortgage interest rates may have nudged people into action on homebuying in November.
Mortgage applications are down 0.7 percent from a week ago, the Mortgage Bankers Association reported Wednesday. But over the last month, mortgage applications for buying new and existing homes jumped 12 percent. The surge came as interest rates on 30-year fixed-rate conventional mortgages shot up to 4.27 percent from 3.77 percent.
People who were thinking about buying maybe said, Ill buy now, said Michael Fratantoni, economist for the association. Yet, he said, the recent surge may have also happened partly because mortgage credit has become more available and also because the job market has improved and the election relieved some uncertainty about the future.
Meanwhile, refinancing activity plunged 28 percent last month. The downturn is typical, Fratantoni said. Refinancing is almost entirely driven by rates, so when rates climb, people decide not to refinance existing mortgages.
The average mortgage loan reached $247,563 in the third quarter, an all-time high since the Mortgage Bankers Association began tracking that figure, the organization reported Wednesday.
Since the election, expectations of higher inflation have risen and 10-year Treasury bond yields have moved up a sizable half of a percentage point in anticipation of some inflation and a greater willingness by the Federal Reserve to raise rates. The Fed is expected by economists to raise interest rates a quarter of a percentage point next week and slowly adjust rates higher in 2017.
Mortgage rates are not set by the Fed, but they tend to move with the direction established by the Fed and are tied to yields on 10-year U.S. Treasury bonds. Last quarter, the 10-year Treasury bond was yielding 1.6 percent and Wednesday it was at 2.35 percent, a sizable jump in such a short period.
The Mortgage Bankers Association is predicting that the yield will be 2.5 percent late in 2017 and the rate on a 30-year fixed rate mortgage will rise to 4.4 percent.
Despite the rise in people seeking mortgages for home purchases lately, Fratantoni said getting a loan is still difficult for many potential homebuyers. Mortgage credit increased in November, making it possible for more people to buy, but it remains tight, he said.
The association tracks mortgage availability through an index. When mortgages were easily available prior to the housing market crash, the index rose above 800. It became very difficult to get a mortgage after the housing crisis and recession in 2008, and the index fell to 100 in 2012. Now, its at 160 an improvement but still tight, Fratantoni said.
Some relief has come as Fannie Mae and Freddie Mac recently have agreed to purchase from lenders loans with less stringent requirements. The loans, under the new programs, can allow homebuyers to make down payments of just 3 to 5 percent making it easier for young first-time homebuyers to come up with the money needed to make a purchase, Fratantoni said. Without backing from Fannie and Freddie, homebuyers may have to save substantially more to provide down payments equaling 20 percent of the home purchase price.
There has also been slightly more leniency on credit scores, but requirements continue to remain tough. The average credit score for homebuyers getting mortgages backed by Freddie Mac recently has been 750, Fratantoni said. Thats a relatively high score. People who can get loans through the Federal Housing Administration have scores averaging about 700. FHA loans are intended to make homes affordable for moderate-income people.
The process of getting a loan continues to be challenging for the first-time buyer, Fratantoni said, but credit availability has increased for three consecutive months.