Warren Buffett Says Capitalizing on Todays Mortgage Rates is a No-Brainer

December 02, 2014

Even as the Federal Reserve's quantitative easing program nears the end of its tapering process, mortgage interest rates have remained remarkably low. In fact, as the fourth quarter began, falling rates were encouraging increased late-season activity from homebuyers. According to the Mortgage Bankers Association, mortgage application volumes were again on the rise to begin October, thanks primarily to still-favorable borrowing costs. The 3.8 percent week-over-week jump in applications included a 5 percent jump in the refinance share of activity, with the average contract interest on a 30-year fixed-rate mortgage falling to 4.30 percent for loans with 80 percent loan-to-value ratios. Rates have continued to drop amid recent stock market stagnation, nearing their lowest levels for the year and prompting many analysts and investors to tout the accommodative nature of the current buyer's market. Bloomberg reported Warren Buffett, billionaire investor and chairman of Berkshire Hathaway Inc., told a recent conference gathering in Laguna Niguel, California, there's no better time than the present to pull the trigger on a new home purchase. "You would think that people would be lining up now to get mortgages to buy a home," Buffett told attendees of the conference, hosted by Fortune magazine. "It's a good way to go short the dollar, short interest rates. It's a no-brainer. But so far home construction pickup has been slower than I had anticipated. Construction to come? Buffett's allusion to the need for more housing inventory is supported by the latest Commerce Department data for housing starts, which revealed sporadic activity to close the third quarter. Starts reached their highest annualized rate in nearly seven years during July, only to slump again after labor sector data revealed slow wage growth and a surprisingly modest number of jobs added in August. The 84-year-old Buffett, who heads an Omaha, Nebraska-based company with channels devoted to homebuilding, carpeting and masonry, among other trades, added he anticipates construction rates will pick up once more before year's end - a prediction buoyed by a strong recently released September jobs report. With enhanced household wealth and improved consumer sentiment, demand levels are expected to pick back up, theoretically supported by greater supply. Household formation falls off dramatically in a recession, at least initially Buffett said, adding that the low rate of national homeownership should not be considered a major long-term concern. But that doesn't last long. Hormones kick in and in-laws get tiresome, too." No time like the present Perhaps most promisingly, the recent fall from mortgage rates was preceded by nothing of note - if anything, signs have been pointing to a gradual uptick in borrowing costs, Mortgage News Daily reported. The Fed will complete its bond-buying program by the end of October, and the consensus expectation is for interest rates to rise incrementally over the next year. That still may prove true, and if it does, it only makes the current window that much more attractive for prospective buyers. The most prevalently quoted conforming 30-year fixed rate for the very best scenarios has moved quickly from being worryingly close to 4.375 percent to being excitingly close to 4.0 percent noted Matthew Graham of Mortgage News Daily. The most interesting thing about the movement the past two days is that there is no big-ticket headline motivating it. This is simply traders moving money for a variety of reasons. No one can know what all the motivations for that might be. In any event, the developments bode well for house hunters, who also have easing rates of home price appreciation and an improving job market working in their favor. How long the buyer-friendly environment will last remains to be seen, but as Buffett said, the reaction is to act.

Confidence among homebuilders improved substantially from June to July, offering an indication that the housing market could possess some underlying strength.

Builder confidence sagged earlier this year, thanks primarily to winter weather conditions that hindered construction projects and hurt sales across the Midwest and Northeast. Even with purchase rates slumping again to begin the third quarter, the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) eclipsed a rather noteworthy benchmark by climbing to a reading of 53 for July. Scores greater than 50 signal that there are more industry members expressing optimism about the current conditions than there are who are down on the market.

July represented the first month since January that the HMI registered a score of better than 50, and given the index's traditional reliability as a barometer for near-future market activity, the latest returns are promising. For much of 2014, inflated costs for building materials and permits, along with tight inventory in many areas of the U.S., have dampened the outlooks of builders regarding the housing industry as a whole. But the late spring and early summer have seen the job market continue to make progress, with the latest Employment Situation Summary for June revealing that the national unemployment rate fell to 6.1 percent - the lowest level in nearly six years.

"An improving job market goes hand in hand with a rise in builder confidence," said David Crowe, chief economist for the NAHB. "As employment increases and those with jobs feel more secure about their own economic situation, they are more likely to feel comfortable about buying a home."

Improving market conditions mean opportunities abound

Americans applied for fewer mortgages to begin July, according to a survey from the Mortgage Bankers Association, but prospective shoppers may be pleased to find that every component of the HMI was improved for July. Builders responded that sales conditions were better, while the index for future sales expectations was up, as well. The gauge of prospective buyer traffic was the only index component lagging behind, but there's a hope that with the labor market improvements, consumer sentiment will also be improved.

"This is the first time that builder confidence has been above 50 since January and an important sign that it is strengthening as pent-up demand brings more buyers into the marketplace," said Kevin Kelly, chairman of the NAHB.

The next step, of course, is for that demand to manifest itself in the form of more buying activity.