By Hovik.Shahinian@nafinc.com
December 10, 2014
December 09, 2014 Interest-rate increases may be on the way within the next year, but prospective home buyers and owners seem to be capitalizing on favorable borrowing costs while they last. The Federal Reserve's quantitative easing program, which has helped stimulate economic growth for the better part of the past six years, is due to be fully tapered by the end of October. At that point, an interim period during which the central bank has pledged it will maintain an accommodative policy despite no longer purchasing assets will begin. That means the key federal funds rate will not be adjusted – in the words of Fed Chair Janet Yellen, for a "considerable time" – until at least the second quarter of 2015. Despite widespread speculation, Yellen and other policymakers have been intentionally vague about the timeline for such adjustments, insisting the process is fluid and further progress toward labor sector and inflationary goals must be made before rates can be raised. That means low borrowing costs will remain in place in the near term in hopes of driving consumer spending and economic growth at a time when the rest of the global economy appears stuck in neutral. October opportunists If the early-October returns are any indication, the low-interest environment is serving as a boon to the housing industry by helping generate more sales traffic. After the average contract interest-rate for 30-year fixed-rate mortgages with conforming loan balances dipped to 4.20 percent – the lowest level seen since June 2013 – mortgage application volume swelled. The latest survey from the Mortgage Bankers Association revealed applications were up 5.6 percent on a week-over-week basis through Oct. 10, with the refinance index increasing 11 percent. The latter figure highlights the impact of downward rate movement, much of which was precipitated by deflation in the eurozone and ongoing tumult in many emerging international markers combining to drive down domestic consumer costs. "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," said Mike Fratantoni, chief economist for the MBA. "Refinance application volume reached the highest level since June 2014 as a result, with conventional refinance volume at its highest since February 2014." A refinancing resurgence Refinancing accounted for 59 percent of all applications during October's first full week, with adjustable-rate mortgage refinances representing 8 percent of the activity. Many homeowners seeking cash-out refinance strategies are finding the current rate environment both advantageous and timely, and there's a sense that if you're going to make a move, it's best to do so now. The Fed has made it clear it will telegraph any moves toward adjusting the key funds rate well in advance, but many homeowners seem to feel there's no reason to wait around. The effective rate decrease seen through Oct. 10 was paired with declines in points, from 0.19 to 0.17, on mortgages with loan-to-value ratios of 80 percent. Contract interest rates for 15-year FRMs also fell from 3.48 percent to an average of 3.41 percent, with the latter figure representing the most affordable level seen since July 2014. Average rates for 5/1 ARMs fell from 3.20 percent to 3.05 percent, which represented a new 16-month low. Both current homeowners and prospective buyers are in position to take advantage of the current accommodative consumer environment. The European Central Bank recently implemented a second significant wave of stimulus measures, hoping to combat the region's deflationary pressure. If successful, those measures could trigger some movement from U.S. borrowing costs. But the Fed has indicated the interim window – between the end of tapering and the first funds-rate adjustment – will last at least six months. That's ample time for both buyers and refinancers to make moves.