A few weeks ago, I argued that there’s a potentially useful collision of a number of trends occurring in the housing market:
–mortgage rates are hitting historical lows;
–home prices are finally appreciating;
–refis are up.
These developments have a lot in common, of course. First, they interact in positive ways for borrowers and for the economy. As home prices appreciate, some underwater homeowners will break the surface (last I checked, there were 1.3 million such cases through the first half of this year). That helps them refinance their home loans into lower rates.
Even for underwater borrowers, an Obama administration housing program—the HARP—is finally gaining some real traction helping underwater borrowers to refi. As Mark Zandi noted in the WaPo the other day:
The administration has also succeeded in ramping up its Housing Affordable Refinance Program. HARP makes it easier for homeowners with Fannie and Freddie mortgages to refinance their loans even if they are deeply underwater. HARP was stalled until the administration persuaded Fannie Mae and Freddie Mac to make some changes; now, with the help of record-low mortgage rates, HARP has gone into overdrive. Assuming mortgage rates stay low, nearly 3 million homeowners will eventually benefit from the program.
That’s where the Federal Reserve comes in: their QE3 program is helping to push already low mortgage rates down even further (by adding liquidity to the mortgage backed securities market). Last I checked, the average borrowing rate on a 30-year fixed rate mortgage was 3.36%, the lowest on record from this data series that goes back to the mid-1970s.
There’s something else these trends have in common: they’re all in no small part the result of public policy targeted at the housing market. There have been many policy interventions targeted at offsetting the very deep market failure in housing, and while it’s definitely taken them too long to take hold, these measures are finally helping in ways that could give this sloggy economy a useful boost.
How? One way is through refi’s that can significantly lower a borrower’s monthly payment. HUD data through the first half of this year show the typical refinancer reducing their yearly mortgage payments by around $2,200 (those with refis through HARP very likely do better than average since they’ve been locked out of the refi market for so long while rates have tumbled). That’s real money to middle-income families and real stimulus to the economy at a time when fiscal policy is actually—and wrongheadedly—contractionary.
Moreover, the MBA’s refinancing index is growing strongly, especially in states where home prices got whacked the hardest. Their index of applications is at a three-year high, and its growth over the past year in the nation and a number of states with the largest shares of underwater mortgages is shown the figure below.
Applications for refis in Nevada, Florida, Arizona, and Michigan have all more than doubled over the past year, with Mississippi and Georgia not too far behind. Among the states with the biggest home price declines, only California is a refi laggard. Of course, in a housing market that’s just crawling out of the primordial soup left by the bursting of the massive housing bubble, these growth rates are off of very low bases. But in the context of the housing market dynamic described above, they’re still good to see.
The housing market is not out of the woods yet, for sure, and there are still millions of foreclosures in the pipeline. But if these three trends continue to favorably interact, they should help things look up a bit for a lot of homeowners who’ve been looking down for way too long.
Source: Mortgage Bankers’ Association