Mortgage rates dip to 2017 lows

April 13th, 2017 10:41am
Low primary market interest rates may be an unwelcome headline for some mortgage lenders, but the forecast still looks bright for them in the long run.

Average mortgage interest rates had been relatively stagnant for much of the year, but according to the latest data, those numbers may now be in the midst of a downward trend.

According to Freddie Mac's weekly Primary Mortgage Market Survey released April 13, average 30-year rates reached 4.08 percent. That marks the lowest point for the benchmark since the start of the 2017 calendar year. Interest rates had been on an upswing thanks to a bullish economy and actions on the part of the Federal Reserve in late 2016. At this time last year, average 30-year rates were 3.58 percent.

The main reason for this latest downswing in rates, according to Freddie Mac, can most likely be attributed to a disappointing employment report release a week earlier. Federal hiring data from March released in the first week of April indicated 98,000 new jobs were added to U.S. payrolls that month, versus an anticipated figure around 180,000. According to CNBC, jobs figures fell primarily due to harsh winter weather in parts of the country, as well as underperformance throughout the retail sector.

Low primary market interest rates may be an unwelcome headline for some mortgage lenders, but the forecast still looks bright for them in the long run. Freddie Mac economists reported that the housing market posted impressive numbers in 2016, in line with the American economy as a whole. In the fourth quarter of last year, real gross domestic product grew at a rate of 1.9 percent. At the same time, average home prices grew 6.5 percent over the course of the year, while total home sales eclipsed 6 million. Rounding out the year's impressive figures, total loan originations exceeded $2.1 trillion in cumulative value.

Freddie Mac noted that some of these strong sales numbers could well be attributed to low interest rates, which averaged less than 3 percent in 2016. As the economy begins to adjust to newfound growth, these rates will begin to tick up, bringing both positive and negative effects for everyone involved. Freddie Mac economists expect the 30-year PMMS to average 4.4 percent in 2017, and around 4.8 percent in 2018.

Housing affordability remains a key issue

With historically low interest rates like these, even a modest increase in the cost of a mortgage won't act as a bottleneck on home sales or homeownership. Rather, according to Freddie Mac economists, even the relatively small projected rate increase will have an outsized effect on homebuyers whose incomes are not keeping pace.

"Since January 2000, home prices have risen a bit faster than incomes, though recently home price growth has outpaced income growth by a wider margin," Freddie Mac said in a research release. "From January 2000 to December 2016, home prices, as measured by the FHFA purchase-only house price index, increased 76 percent, while over that time per capita disposable income increased 72 percent."

In essence, the report explains that Americans who invested in their home at some point in the last 16 years have seen better returns on that investment than their paychecks.

The trend can also be seen in the Home Affordability Index compiled by the National Association of Realtors. This measures home affordability for a family earning the median income buying a home priced exactly at the national median. A score of 100 on this index indicates total parity. In 2012, the HAI reached 200, its highest-ever level, before dipping back down to around 162. That means a family earning the national median income could afford a home priced 62 percent higher than the median sales price of existing single family homes.

But the HAI varies widely around the country. Using a different measurement designed for local market trends, it's clear that certain metropolitan areas are almost completely unaffordable to buyers who earn a perfect median income. For example, only 7.8 percent of homes in the San Francisco area are deemed to be affordable based on this metric.

As economic growth picks up, real estate professionals must watch these key market indicators very closely to maintain a check on the pulse of the overall housing market.

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