by Amy Lillard
March 17, 2009 - The long slide of interest rates downward may be halted by the recent surge in refinancing, and may stay between an average of 5% to 5.25% for the next few months.
Benchmark mortgage rates have fallen nearly a full percentage point since late November, a historical low and a sharp drop from last year's levels. But some analysts contend rates must fall closer to the 4.5% level to ease U.S. housing woes.
Keeping rates from falling consistently below the 5% mark is the jump in refinancing this year. Homeowners have rushed to take advantage of low rates. The Mortgage Bankers Association reported this week that the volume of mortgage applications filed last week rose a seasonally adjusted 21.2% over the previous week. This major boost was driven by filings to refinance existing home loans, which increased 29.6%. New home mortgage applications only rose 1.5%.
The current state of interest rate affairs began last year as the Federal Reserve deliberately made a succession of cuts to stimulate a floundering sector. Ultimately, the central bank cut the short-term interest rate all the way to zero. Today's long-term rates are influenced by these cuts, but also external factors such as consumer demand and lender decisions.
Analysts say these rates will hover around these levels for some time. In addition to the surge in refinancing , which discourages lenders from slashing rates further, rates on mortgage-backed securities are still falling. The Fed has been buying these pooled mortgages in an effort to drive down rates, and it's worked, but not necessarily for borrowers. Rates on these securities are still falling and to a greater degree than consumer rates, meaning homebuyers aren't getting all the benefit.
Other real estate news shows uncertainty shrouding the market in other ways. U.S. housing starts surged 22% in February, on the strength of an 82% increase in construction of apartment buildings, the Commerce Department estimated this week. It was the largest percentage gain in 19 years, and the first increase in eight months.
But analysts cautioned that monthly housing start data can be volatile and subject to weather-related flukes. Plus, perspective shows the persistence of tough times in the housing sector: Housing starts are down 47% from a year ago, and 74% from the peak in early 2006. Inventories of unsold homes are wide, and increasing everyday with foreclosed homes. Homebuilder mood, reported by the National Association of Home Builders, is stuck at a 9 on a scale of 1 to 100.
Building permit data is more reliable, and showed a 3% gain in February. Permits for single-family units rose 11%, the largest percentage gain in 18 years.
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