Mortgage rates at historic lows: five reasons consumers still wary

Mortgage rates are at a historic low – 4.21 percent for a 30-year fixed-rate loan.

In other words, since financial companies started keeping track of mortgage rates in 1971 – when GIs were being sent to fight in the jungles of Vietnam, Rod Stewart was belting out “Maggie May,” and the median price of a home was $24,300 – this has never happened.

Such low rates have started to get many Americans to think about refinancing their mortgages or even getting off the fence to buy a house.

On Wednesday, for example, the Mortgage Bankers Association (MBA) said mortgage loan application volume rose by 14.6 percent from the prior week. And the MBA’s measure of refinancing rose by 20 percent.

Mortgage brokers are calling potential clients urging them to take advantage of the low rates.

“It’s amazing, I don’t know why they are not jumping at the chance,” says Dianne Crosby, a senior loan consultant at LaSalle Financial Services in Oakland, Calif. “If you already own a home, you can refinance and save money on your payments, and if you are renting, you probably purchase real estate now.”

But, even with rates this low, economists say there are issues for many potential borrowers.

Higher credit standards. “One reason the low rates are not stimulating the housing market more is that credit standards are a lot tougher than the past,” says Brian Bethune, chief US financial economist for IHS Global Insight in Lexington, Mass. “It’s a lot tougher to qualify for that rate and the down payment requirements are back to a higher standard than what they had been.”

But Ms. Crosby disagrees. “I think there is a lot of exaggeration on those issues,” she says. “When people come to me their credit scores are better than they think.”

She says the credit-score requirement for a conventional loan is for a 680 FICO score. For a first-time buyer using an FHA loan, the credit score is lower – only 640.

Higher down payments. But down payments are higher than they used to be for conventional mortgages, not those involving the FHA or other quasi-governmental agencies. The mortgages where the borrower only put up 10 percent equity and borrow the rest are gone. Instead, Crosby says lenders want 20 percent down. But, she says that’s not the real problem.

“Buyers have money,” she says, “But they are reluctant to use it because some are afraid of future unemployment.”

Worries about home values. Another reason potential home buyers remain wary is because many of them are worried that if they buy a house it will go down in value, says economist Lyle Gramley, a former Federal Reserve governor.

The latest S&P/Case-Shiller Home Price Index showed a small gain in housing prices in July. But, on a year-over-year basis, only a few markets such as San Francisco, Los Angeles, and Washington had robust gains.

In fact, Mr. Gramley points out one of the reasons many people can’t refinance even though interest rates are low is because they are losing money on their homes. “If you are underwater on your house, the bank is not likely to refinance,” he says.

Low consumer confidence. At the same time, consumer confidence is relatively fragile, says Mr. Bethune of IHS Global Insight. Some of the consumer concern is because of the lack of job growth and reports about potential layoffs especially among municipal employees.

Wait-and-see consumers. Yet other potential homeowners could be waiting for interest rates to fall further. For example, the financial markets expect the Federal Reserve to begin a program of buying longer term Treasury notes shortly in an effort to lower rates.

But that would lower mortgage rates to about 4 percent – in other words not a lot lower – because some of that effort is already priced into the bond markets, Bethune says.

“At least half of the potential impact is already priced in,” he estimates. “Maybe we could see a drop of another 10 to 15 points."