Mortgage rates are down. At the end of September, Freddie Mac reported that mortgage rates had been declining for nine weeks.
For much of the past year, the marketplace has been watching the Federal Reserve, wondering when it would slow its purchases of mortgage-backed securities and long-term Treasuries. Those purchases -- at the rate of $85 billion per month -- helped push 2012 interest rates to their lowest levels in decades. For 2013 rates are higher, but "higher" is a relative term: Standard & Poors reports that during the past 40 years the typical borrower paid 8.9 percent for mortgage money -- about twice the going rate today.
So what does all of this mean for borrowers?
First, Fed watching is not over. The prevailing view seems to be that the Fed will slow it's monthly purchases in October, but then that was also the prevailing view in September when the Fed did nothing. The reality is that no one knows what will happen, despite chatter to the contrary.
Could it be that some of the expected rate increases associated with a downsizing of Fed purchases has already been anticipated by the market? Is that why mortgage rates have recently declined?
There's another school of thought which says asking when the Fed will slow or stop its monthly purchase program is asking the wrong question. The right question, it is argued, is whether the Fed can stop. In this view -- if the answer is "no" -- then we have a completely new set of problems to ponder.
Easing Lending Standards
Second, have you noticed the many news stories which now say the lending process has eased?
Ellie Mae, a mortgage technology company, says that in August mortgages were closing faster than a year ago.
"In August 2013, the average FICO score for closed loans dropped to 734, the lowest level since we began our tracking in August 2011,” said said Jonathan Corr, Ellie Mae's president and chief operating officer. “Meanwhile, loan-to-value and debt-to-income ratios rose slightly again last month -- continuing the credit-easing trend."
Here's an observation: Interest rates are up from the record lows of 2012. Loans were regarded by many as hard-to-get last year when mortgage demand was enormous, but now with higher rates mortgages are easier to get. Hmm....
Third, home prices keep rising. Real estate values have now increased for 18 consecutive months, according to the National Association of Realtors. It says August existing home prices were 14.7 percent higher than a year ago. That's a lot, a level of price growth which does not seem sustainable.
We usually think that higher mortgage rates mean less affordability, and as a result, home price increases slow. And yet, prices are up substantially this year even though mortgage rates have also risen. This is not what the charts are supposed to show.
What to make of all of this?
We remain in a marketplace without historic precedence. It's like physics -- at some level the usual rules do not apply and we have apparently found that level.
For those considering financing or refinancing, the important question of the moment is this: Do you see mortgage rates rising or falling in the coming year? If the answer is "rising" then now would be a good time to look at today's loan options.