Got Whiplash?! Higher / Lower Mortgage Rates Impact Housing Recovery

Homebuyers and homeowners are backing away from higher mortgage interest rates, but that recent period of ultra-low mortgage rates continues to help homeowners avoid defaulting on existing mortgages.

These two sides of the mortgage interest rate market reflect the impact of both this year's hike in mortgage interest rates and previously lower interest rates, according to two new reports from Capital Economics.

Mortgage Rates: Up!

Thirty-year mortgage interest rates averaged 4.48 in early August, up more than a percentage point since the last low of 3.35 percent in early May. The low for 2013 was 3.34 percent in January, according to Freddie Mac.

Home Refinancing: Down!

Mortgage applications for refinancing home purchases were down a whopping 24 percent from June to July, while applications for home purchases dropped 5.6 percent during the same period, Capital Economics reported.

There remains some refinance wiggle room for homeowners who purchased homes in 2008 or earlier, when rates were one or two percentage points higher than they are now.

Credit Availability: Up!

Also, for homebuyers, today's higher rates can actually spur more buyers to come to market before rates get even higher, but they still face tight-fisted lenders.

The Federal Reserve Board's July Senior Loan Officer Opinion Survey reveals lenders are only marginally easing the availability of mortgage credit - too slowly to keep up with rising mortgage rates.

Mortgage Defaults: Down!

Thanks to previously lower mortgage rates, delinquencies, foreclosures and foreclosure inventories were all down in the second quarter, compared to the first quarter. "We don't think that higher rates will dent the delinquency and foreclosure picture particularly severely," reports Capital Economics.

That's because the big beneficiaries of lower mortgage rates were refinancing homeowners or buyers who locked in fixed rates at a bargain-basement level before rates rose higher. The Mortgage Bankers Association (MBA) said the share of borrowers delinquent on at least one mortgage payment, but not yet in foreclosure, fell below 7 percent in the second quarter for the first time since early-2008.

The share of borrowers who were behind by 30 to 60 days ticked lower – indicating that fewer borrowers are falling behind for the first time. Also down by 0.64 percent was the foreclosure start rate and the foreclosure inventory rate, down by 3.33 percent.

Housing Market Health: Up!

The shrinking pipeline of foreclosures means the danger of those properties coming onto the market over the next several years has fallen from 14 percent to 10 percent, says Capital Economics. In addition, while some states, including New York, remain overloaded with delinquencies, many of them are at or only slightly above long-term averages.

"Fewer than 5 percent of outstanding mortgages are on adjustable rates, meaning that very few existing borrowers will be directly affected by the hike in rates. And even for new borrowers paying today’s higher rates, affordability is very favorable. They were paying out an average of 16 percent of earnings in mortgage costs in July, compared to a long-run average of 22 percent," Capital Economics reports.

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