Mortgage rates near record lows; housing market not responding

a blue sign advertising refinancing at low rates

Mortgage rates hit record lows this week, but expired tax credits, unemployment and foreclosures continue to drag down the U.S. housing market. Flickr photo.

Mortgage rates hit the lowest levels of the year this week — almost to record lows. Very low mortgage rates should be good news for U.S. housing market predictions 2010, shouldn’t they? Existing home prices and existing home sales were up in April — another bit of good news, right? But despite the attractive mortgage rates, mortgage applications plummeted after the home buyer tax credit deadline April 30. Plus, many homeowners are still out of work, more than 1 million more foreclosures are expected to occur and banks still have yet to put the homes they’ve already seized on the market. The housing market recovery everyone is hoping for will have to wait. In fact, the U.S. housing market may have yet to bottom out.

Mortgage rate trends

The average mortgage rate dropped to 4.72 percent this week, down from 4.79 percent last week, according to mortgage finance company Freddie Mac. It was just above the record of 4.71 set last December. Mortgage rate trends point even lower. The average rate on a 15-year fixed-rate mortgage hit 4.17 percent, down from 4.2 percent last week and the lowest on record since August 1991. But the U.S. housing market is not responding. The Associated Press reports the market is struggling without a tax credit of up to $8,000 for first-time buyers, which expired at the end of April. A campaign by the Federal Reserve to reduce borrowing costs for consumers pushed mortgage rate trends down to extraordinarily low levels last year. Rates were expected to rise after the program ended this spring, but have fallen instead over the past two months.

Mortgage rate forecast

The mortgage rate forecast is subject to a domino effect of economic setbacks. A jobs report released last week showed that private sector hiring was practically non-existent at 41,000 jobs. Investors worried about the stock market shifted money into the safety of U.S. Treasury bonds. The Los Angeles Times reports that investors have rushed to buy Treasury securities since late April, in the process driving market yields on the bonds sharply lower. Investors bought $21 billion of the securities at a Treasury auction Wednesday, even though they are paying just 3.20 percent. That demand has pushed down the yield on U.S. Treasury debt. The mortgage rate forecast tends to track that yield.

Housing market predictions 2010

With mortgage rates at near record lows, the number of customers applying for a mortgage to purchase a property fell to the lowest level in 13 years last week and was down 35 percent from a month ago, according to the Mortgage Bankers Association. MarketWatch reports that any housing market recovery will likely continue to be slowed by additional homes on the market from “shadow inventory” and “sidelined sellers.” Shadow inventory is foreclosed homes banks are holding that haven’t hit the market yet. There are also severely delinquent homeowners who haven’t entered foreclosure yet. Analysts expect foreclosures to peak later this year or next at about 2 million.

Housing market recovery on hold

Sidelined sellers are people who want to sell their homes but are waiting for the housing market recovery. MarketWatch reports that about 7 percent of homeowners — representing more than 5 million homes — fall into this category. They will likely be waiting for a while. The U.S. unemployment rate was 9.7 percent in May. Salaries are being frozen, or cut. In a National Foundation for Credit Counseling survey of more than 2,000 consumers, 49 percent said if they tried to buy a home they’d never be able to save enough money for a down payment. People underwater on their mortgages, about 25 percent of borrowers, can’t get the financing to move to another house. People who are shopping for mortgages are not only worried about getting a home, but also their ability to keep it. Doug Duncan, chief economist at Fannie Mae, told MarketWatch that in the long run, that attitude is a good thing for the economy.

Finally, some good news.

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