Second thoughts on how low mortgage rates will go

By Alan J. Heavens
Inquirer Real Estate Writer

A few months ago, the 4.5 percent fixed-rate mortgage was being called real estate’s “sweet spot,” a surefire way to spark home sales – especially in markets where prices weren’t falling fast enough for eager buyers.

Estimated time of arrival: Now, the experts predicted.

But the latest Weekly Primary Mortgage Market Survey, released Thursday by Freddie Mac, showed the 30-year fixed rate at 5.32 percent, almost three-quarters of a percentage point higher than it was six weeks ago.

“I think that benchmark rate was just a trial balloon,” said Philadelphia mortgage broker and CNBC pundit Fred Glick.

Moody’s Economy.com chief economist Mark Zandi, who had been leaning toward the 4.5 percent rate by summer, is hedging his bet.

Now, “4.5 percent seems increasingly less likely,” Zandi acknowledged. “I’m hoping rates move back to below 5 percent in the next few weeks.”

Bankrate.com columnist Holden Lewis says the 4.5 percent number was false from the start, calling it a “self-serving notion” pushed by the National Association of Realtors and the National Association of Home Builders.

“I don’t understand why people took this seriously, and why people think the idea came from the Obama administration,” Lewis said. “I mean, if the National Dairy Council tried to persuade the Department of Agriculture to buy one ice cream cone a day for every resident of the United States, I doubt anyone would take it seriously, and I doubt people would think that the idea came from the agriculture secretary.

“However, the ice cream idea would be cheaper and tastier than bringing mortgage rates down to 4.5 percent,” he said.

The Realtors’ group was so sure that 4.5 percent was meant to be that its spokesman, Walt Molony, predicted in December that the rate would generate 500,000 home sales whenever it came to pass.

Today, the association’s focus has shifted to tax credits, specifically the $8,000 available to qualified first-time buyers who purchase before Nov. 30.

And, Molony said yesterday, “we support expanding the tax credit to all buyers of primary residences regardless of income, and extending it into 2010.” A $15,000 credit that would encompass all home buyers was reintroduced in the Senate last month by Georgia Republican Johnny Isakson.

Interest-rate gyrations have not made life easy for mortgage brokers, who deal daily with confused clients.

“There seems to be a lag in the time between a rate change and the public’s awareness of it,” said Jerome Scarpello of Leo Mortgage in Spring House. “When they rose, I had people ask me to contact them if they [went] down.”

No one ever asks about 4.5 percent, though, Scarpello said.

Government intervention in the mortgage market helped push rates down below 5 percent in the spring, but the Obama administration seems to be more concerned these days about braking the foreclosure free-fall than getting more buyers into houses.

For its part, the housing industry seems to pass the time busily dissecting every report, trying to determine whether slightly higher pending sales of previously owned homes, as measured by the Realtors’ group, or slowing home-price declines in April, as crunched by S&P’s Case-Shiller, mean better times are just ahead.

Crumbs – even slightly positive data – look like a banquet when you are starving, Philadelphia economist Kevin Gillen observed.

“Interest rates are being caught between the rock of the recession and the hard place of the federal deficit,” Gillen said. “A slumping economy incentivizes the Fed to lower rates, but financing President Obama’s stimulus-palooza will place upward pressure on interest rates.”

If the economy continues to deteriorate this summer, he said, “look for lower rates, as the Fed will seek to provide further support to the economy while kicking the can of our budget deficit down the road.”

Conversely, if the economy improves, “look for rates to nudge higher as the Treasury bids up . . . to finance our borrowing and the Fed raises rates in response to possible inflationary pressures,” said Gillen, a Wharton School research fellow and vice president of Econsult.

“These forces will mostly offset each other for the rest of this year, and hence hold rates generally where they already are,” he said.

The government is reportedly buying 80 percent to 85 percent of loan securitizations from Fannie Mae and Freddie Mac, which means it could overpay for these securities if the administration wanted to, resulting in lower mortgage rates.

“With the federal government holding this kind of market power, you can be confident that mortgage rates are about where the Fed and the Treasury want them to be,” Lewis said. “That’s in the mid to low 5’s, and not in the 4’s.”

No ‘Sweet Spot’

Thirty-year fixed mortgage rates were below 5 percent in 12 of the last 26 weeks.

Date Rate

Jan. 15 4.96

March 19 4.98

March 26 4.85

April 2 4.78

April 9 4.87

April 16 4.82

April 23 4.80

April 30 4.78

May 7 4.84

May 14 4.86

May 21 4.82

May 28 4.91

June 4 5.29

July 2 5.32

Source: Freddie Mac
Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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