Mortgage rates: How far can they fall?
Refinancing by Denver-area homeowners offers a bright light in a gloomy economy
rockymountainnews.com
By John Rebchook, News Real Estate Editor
Denver-area homeowners are expected to pull a record $3.77 billion out of their houses through refinancing and home equity loans this year.
In addition, homeowners likely will save another $3.313 billion over the next five years in monthly mortgage payments, projected Peter Lansing, president of Universal Lending.
"Clearly, you can make a case that we will have an $8 billion economic impact based on the refinancing being done this year," said Lansing, who prepared an analysis of metro area refinancing for the Rocky Mountain News.
The multibillion dollar impact -- a scenario being played out in cities across the country, as mortgage rates have fallen to more than a 30-year low -- is the brightest light on an otherwise gloomy economic landscape.
Experts say it will cushion the impact of the current recession more than any other single factor.
"Refinancing is going to be the cornerstone of the recovery in the economy," Larry Mizel, chairman of M.D.C. Holdings Inc., parent of Richmond American Homes, said last week at a Compass Bank economic forecast breakfast.
On Thursday, Freddie Mac reported that the average 30-year, fixed-rate loan stood at 6.45 percent, the lowest since it began its weekly survey of national mortgage rates three decades ago. And in the West, which includes Colorado, the average rate was 6.39 percent. A year ago, the rate was at 7.79 percent.
The average for a 15-year, fixed-rate loan was 5.94 percent and a one-year Adjustable Rate Mortgage stood at 5.3 percent, according to Freddie Mac, which along with Fannie Mae buys and sells packages of mortgages, assuring a steady supply of money for home loans.
The historic low rates are a result of the slowing economy that was dealt a blow by the terrorist attacks on Sept. 11 and the Federal Reserve Board's unprecedented 10 cuts in its discount rate this year.
Federal Reserve Chairman Alan Greenspan hopes lowering borrowing costs will jump-start the economy. Although the Fed's short-term rates don't directly correlate to long-term fixed-rate loans, they eventually can help create an environment of low mortgage rates.
And rates may come down even more.
"I think we're going to see 30-year rates fall below 6 percent," said Scot Wetzel, president of Compass Bank Colorado.
In addition, homeowners increasingly are taking advantage of 5-year adjustable rate mortgages, where the rate can be as low as 5.25 percent for the first five years of the 30-year loan.
Vectra Bank is offering 10-year and 7-year loans that will increase most people's monthly payments, but will save them tens of thousands of dollars in interest over the life of the loan.
Vectra bank will hold about $75 million in these "niche" loans in its portfolio, in addition to making $50 million to $60 million each month in more traditional loans, said Bruce Alexander, president of Vectra Bank Colorado.
The multibillion dollar impact of refinancing "is a pretty dramatic statement," Alexander said. "A lot of people are taking cash out and paying off debt and upgrading their homes."
Lansing based his projections on data from Denver-based SKLD Information Services LLC, which has been tracking the mortgage markets in the metro area for more than 35 years.
Savings of $150 a month
How low is too low?
SKLD shows that through September, 189,129 home loans have been refinanced for a total of $42.96 billion in conventional loans. That's only $10 billion less than the record $53.82 billion in 1998, when mortgage rates also were hovering at less than 7 percent for a good portion of the year.
In addition, lenders made another $4.9 billion in Federal Housing Administration-insured and Veterans Administration-backed loans, but SKLD didn't break out how many of those government loans were for refinancing.
Lansing calculates that by year-end, homeowners will have refinanced $64.4 billion in mortgages.
Nationally, 63 percent of the people refinancing are pulling money out of their homes.
At Universal Lending, the average homeowner is pulling $17,000 in cash out. Using those numbers, Lansing calculated the $3.77 billion figure.
He also estimated that the average person refinancing is cutting his payment by $150 a month, which would save homeowners a total of $3.3 billion over the next five years, or slightly more than $600 million each year.
And those numbers may be conservative.
"Anecdotally, I'm hearing that people are taking out an average of $20,000 or $25,000," said De Wayne Perry, principal of D.W. & Perry mortgage company. "I think this is the one thing that dampens the severity of what appears to be a pretty major economic downturn."
James Vaden, a sales associate at SKLD, said there's no question that this will be a record year for refinancing.
"Mortgage brokers are refinancing everybody they can think of," Vaden said. "We've already closed more (total) loans this year than in all of last year, and almost all of them are for refinances."
Rick Pederson, chairman of the Ross Consulting Group, a real estate advisory firm affiliated with the Frederick Ross Co., said nothing will help the economy more than people using their houses as piggy banks.
"Pound for pound, the money put into the economy by refinancing is probably more important than all of the other tax cuts. It probably is the single most important thing going on."
Not only are the Fed cuts impacting the long-term mortgage rates, but the government's recent decision to stop selling 30-year bonds also is pushing rates down, he said.
Pederson is practicing what he preaches.
"I'm in the midst of refinancing right now," he said. "Even someone like me, without the most expensive home around, can save $200 or $300 a month."
Pederson said he probably will use some of his money to invest in either the debt or equity of beaten down stock.
People are afraid of downturn
Mortgage banker Perry said most people who are refinancing won't be going on buying binges like they did when the pulled cash out of their homes in 1998. At that time, the high-tech economy was roaring, unemployment was low and there was little fear of layoffs.
By contrast, about 30,000 jobs have been cut in the Denver area this year and more are likely on the way.
Saving pumps less money into the economy, and consumer spending accounts for two-thirds of the economy.
"People are real reluctant to go out and spend money and for good reasons," Perry said. "They're afraid of this downturn."
November 10, 2001 |
