Mortgage rates hold steady

As of Feb. 16, the national average for a 30-year fixed rate mortgage was 6.16 percent, up only slightly from the beginning of the year and only about a point higher than the historic low of 4.99 percent in June 2003.

Springfield-area rates are sticking close to the national average; most banks are offering rates between 6 percent and 6.5 percent for 30-year fixed loans.

Jerry Palmer, loan officer with First Horizon Home Loan Corp., said continued low rates can be attributed to several factors, including the strength of the bond market.

“A large part of investors’ money has been in the bond sector,” Palmer said. “Stocks are improving, but the way I see it, either bonds are a good investment or stocks are – not both at the same time.” He added that the 10-year U.S. Treasury bill rate – 4.5 percent as of Feb. 27 – usually controls mortgage rate movement.

The future of the market

Mike Fratantoni, senior economist with the national Mortgage Bankers Association, said 10-year Treasury rates are below the prime rate set by the Federal Reserve, a situation known as an inverted yield curve. That is what has allowed 30-year mortgage rates to rise only about 1.5 percent even though the prime rate was increased to 5.25 percent in mid-2006 from 1 percent in 2003.

“As investors realize that the rate will hold steady, it will reverse the inverted yield curve. Treasury rates will start to drift up closer to 5 percent, which would indicate that mortgage rates will drift up to 6.5 or 6.6 percent over this year,” Fratantoni said.

First Horizon’s Palmer agreed, saying that, barring any major unforeseen changes, he doesn’t anticipate a significant rate increase in coming months.

“They’re higher than the low mark they hit in the last year or two,” he said. “The rate could get to 6.5 (percent) this year, but I don’t see it getting to 7 (percent) or more. The government can’t afford to mess with the housing market nationwide – it would cripple the industry.”

The Federal Reserve’s rate increases between 2003 and 2006 had the intended effect of slowing rapid home price growth – the median sales price for existing single-family homes, according to the National Association of Realtors, rose just 1.4 percent 2005–2006, compared to 12.2 percent growth the previous year.

Fratantoni, however, said he doesn’t anticipate forthcoming increases in the Fed rate, due to a balance between inflation fears and an economy that is growing below the long-term average.

“We think the risks are about balanced, so the Fed will hold tight,” he said.

Buyers beware

The combination of low rates and decelerating price growth could persuade home buyers to get in over their heads – buying more home than they can afford – especially, Palmer said, considering new loan options.

“You take John Doe couple who just got married, and if they qualify, you can put them on a payment option loan where they just pay (on) the interest (each) month,” he said. “With the interest options, they can make that payment for a while – until that balloon payment comes due. It will come back to get them.”

“The State of the Nation’s Housing Market 2006,” a study by The Joint Center for Housing Studies of Harvard University, said that an estimated 20 percent of the dollar value of all loans and 37 percent of adjustable-rate loans originated in 2005 were interest-only loans, up from just a few percent at the beginning of the decade.

Carl Meyer, sales manager for Countrywide Home Loan Corp. in Springfield, said that he’s not overly concerned about large numbers of buyers getting in too deep or the market taking a hit.

“What I’ve seen over the years is that the market adjusts itself – as rates go up, prices tend to go down or hold,” he said. “Inevitably, if you raise rates enough, it will price some people out of the market. But I don’t think raising rates on a slow pace hurts the market too bad.”

He also pointed out an advantage to some interest-only or adjustable rate loans in the current market: People who took out a three- or five-year ARM when the rates were lowest might have the ability to refinance into a fixed-rate loan, where rates are, in many cases, lower than their adjustable-rate counterparts.

“For some, even though they’re having to refinance, it’s not a bad thing because they’ve been paying such a low rate for the last three to five years that it’s been a good deal for them,” Meyer said.

Scott Rose, president of Greater Springfield Board of Realtors, said that buyers should be aware of their limits – and that adjustable rate loans could eventually make payments too expensive to handle.

“Where people need to be careful is if they’re buying as much house as they can and getting an adjustable rate mortgage, and the rates start to creep up, it’s going to knock their payment out of line,” Rose said. “If you can afford a fixed rate, you can afford a lot more house.”

First Horizon’s Palmer added that mortgage bankers should help potential buyers know their limits. “My philosophy,” he said, “is that if they are getting in too deep, I’m going to tell them.”