Mortgage Rate Drop Sparks Refinancing Boomlet

Alex Stojanov/Alamy
By Diana Olick | @diana_olick

Falling mortgage rates are turning the numbers around once again -- at least when it comes to refinances.

Total mortgage application volume rose 5.6 percent on a seasonally adjusted basis last week from one week earlier, according to the Mortgage Bankers Association. This data was collected even before interest rates crossed below the psychologically significant 4 percent mark Tuesday. The surge was all in refinance applications, which jumped 11 percent week-to-week, but which are still off 27 percent from one year ago.

"Growing concerns about weak economic growth in Europe caused a flight to quality into U.S. assets last week, leading to sharp drops in interest rates. Mortgage rates for most loan products fell to their lowest level since June 2013," said Mike Fratantoni, MBA's Chief Economist. "Refinance application volume reached the highest level since June 2014 as a result."

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.20 percent last week from 4.30 percent the week before. Continued volatility in the U.S. and overseas financial markets at the start of this week pushed that average rate to 4 percent for most lenders Tuesday, but some were offering as low as 3.875 percent to their highest credit-worthy borrowers, according to Mortgage News Daily.

Lower rates, however, did nothing to spur mortgage activity among potential home buyers. Mortgage applications to purchase a home actually fell one percent, on a seasonally adjusted basis, from the previous week. They are now 4 percent lower than they were the same week one year ago, according to the MBA.

"Purchase application volume continues to run behind last year's level, but to a lesser degree. We continue to expect that the strengthening job market should lead to an increase in purchase activity next year," Fratantoni added.

Refinances are taking a growing share of total application volume, 59 percent in this report -- up from 56 percent the previous week, the highest share since February of this year. However, some of the nation's largest banks that reported quarterly earnings Tuesday noted significant drops in mortgage originations, due to weaker refinance volume as a whole. That is, in part, because the banks themselves are still limiting their refinances to customers who pose very little risk. The current surge could be short-lived, if rates turn even slightly higher again, as the pool of borrowers who could benefit from a refinance is small, given still tight lending standards.

"I will say that with all the volatility in the economy, the rates are not dropping as quickly as we would like them to be, but we are certainly looking at a sustained pace of lower interest rates," said Melissa Cohn, President of GuardHill Financial Corporation on CNBC's Street Signs. "If you can lock in a rate in the 3 percent range, you're doing yourself a huge favor."

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Mortgage Rate Drop Sparks Refinancing Boomlet
In 2013, the median lot size of a new sold single-family house was 8,596 square feet, or just under 0.2 acres. While that might not seem like a lot for you suburban homeowners, a regional breakdown shows that the small average size isn't due to urban inhabitants alone. The Northeast enjoys the largest average lot, at 13,052 square feet, while the less densely populated South and West lay claim to just 8,649 square feet and 6,796 square feet, respectively.
From a footprint of 1,650 square feet in 1978, the average American home has grown 50 percent, to 2,478 square feet. Yet tough times seem to be squeezing our expansionary attitude. Although new single-family homes sold in 2013 clocked in at a median 2,478 square feet, single-family homes completed in 2013 amounted to just 2,384 square feet. Homebuilder confidence has plummeted into pessimism in the last few months, hinting that the housing market's road to recovery might be rougher than expected.

While birth rates have held relatively steady for the past 40 years, everyone apparently needs more elbow room. The share of homes with four or more bedrooms has jumped from 27 percent in 1978 to 51 percent in 2013. And where would a bedroom be without a bathroom? While just 8 percent of 1978 homes had three or more baths, 37 percent of homes now fall in that category.

From 2008 to 2013, both the share of homes with four or more bedrooms and the share of homes with three or more bathrooms have jumped 10 percentage points, while median square footage is up 10.9 percent for the same period.

If there's one strong sign of new housing demand, it's home prices. After nose-diving during the Great Recession to a median sales price of just $216,700, home prices have been roaring back up. In 2013, the median sales price for a new single-family home was $268,900. But for those on the housing hunt, don't be discouraged. Home prices today still don't hold a candle to costs in 2006, according to the well-regarded Case-Shiller Home Price Index. In 2006, the index topped 200 before plummeting to less than 140, and current rates put the index just above 170.
It is America, after all. Our industrialized nation was built on the back of Henry Ford, and America is in no danger of breaking its automobile addiction. In 2013, a whopping 300,000 of the 429,000 new single-family homes sold included a two-car garage. And 98,000 new homes included a three-car garage -- the highest amount since 2007. Of all new homes built, only 10,000 failed to include a garage or carport.
American homebuyers are building bigger homes than ever before. But if there's one thing the recent recession has shown us, bigger isn't always better. Although 30 percent of Americans believe real estate is the best long-term investment, homeownership isn't for everyone. There are plenty of reasons to spend less or invest elsewhere -- and leave keeping up with the Joneses to Mr. and Mrs. Smith.
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