Published July 25, 2014
Just in case you think you missed those record low mortgage interest rates, guess what? Your ship has come in – again.
You can now nab a 30-year fixed mortgage for under 4%. That’s the second week in a row, by the way, that rates have been so low. As of this writing, the numbers tick slightly, but the range remains remarkably low – 3.96% to 4.08%. In either extreme, extremely weird, and stunning when you consider we are supposedly in the latter stage of a recovery.
Usually at this point in an economic turnaround, things are rocking, and interest rates are jumping. But we all know the economy isn’t rocking. And as a result, interest rates are not jumping. What’s weird is those rates are dropping, which usually presages something bad happening.
Then again, this hasn’t been your father’s recovery, has it? Even with absurdly-low interest rates for what’s been years now, it’s hard to make the case they’ve triggered any kind of housing boom. Sales of new single-family homes fell 4.9% through the first six months of the year. They were down 8.1% in June. So let’s just say the trend is not the housing industry’s friend.
Economists and real estate experts offer a variety of reasons for this mortgage malaise. Some argue it’s still pretty tough to qualify for a loan, and bankers aren’t making it any easier, demanding more upfront money from borrowers to avoid any of the problems they encountered post-meltdown.
But it’s been more than six years now, and some very sharp numbers crunchers are getting worried. Even bankers who are lending tell me they aren’t seeing a lot of customers lining up. “Caution is the word,” said one. “They just seem very tentative, even skeptical.”
Polls bear out some of this consumer angst. Among young people, in particular, there’s a nagging sense owning a home just might not be all it’s cracked up to be. As personal finance expert Larry Winget recently told me, “they’ve seen their parents lose homes, and that kind of thing sticks with you.”
That’s why so few homebuyers have been millennials. Much of the activity we have seen has come from generally older, often “much” older buyers, and a good many of them, paying cash. The irony, of course, is this pessimism reins when the lowest interest rates of a generation are returning to defy historical norms.
Some call it a classic chicken-and-egg argument. Buyers don’t budge, sensing interest rates might fall even further, and sellers don’t move, hoping their suddenly higher-value homes keep increasing in value. I suspect the low rates actually are inhibiting activity because they’re leaving some to wonder whether they indicate the lackluster recovery they feel in the bones, is playing out in reality. But worse, things are actually GETTING worse.
If so, as the Wall Street Journal points out, the ramifications for the economy could be pronounced, particularly in the second half. The National Association of Home Builders already reports housing’s sway over the economy isn’t what it was…closer to half the 5% employment and growth generator it was.
The fact that home builders are finding land harder, and pricier, to come by doesn’t help matters any. Industry giant Ara Hovnanian recently relayed to me how the days of cheap and available building lots have gone by the wayside, and passing along those increases in some communities hasn’t been easy. Yet he remains optimistic for the longer-term, convinced that household formations still favor the demand over supply side of the equation.
The question is how long that takes and whether these recent hiccups portend something more sinister. Most point to a delicate balance of higher home prices on the one side (median home prices for new homes are up close to 18% over the last two years), and stagnant demand on the other. But history also suggests one of two things eventually happens during such periods: either the prices come down or the demand picks up. Right now, we’re kind of at a standstill.
Add in home appraisals that remain unusually conservative – some realtors argue ridiculously so – and it’s little wonder sellers can unload at the price they want, or even the most eager buyers at the mortgage they want.
It’s a unique phenomenon, and for many, a scary one. Interest rates are once again at all-time lows, but with too few buyers. Those that want in, can’t. And those who can dive in, don’t. None of this means housing still isn’t a compelling investment, but when real estate trendsetter Zillow estimates some home values may take another few years to reach their pre-meltdown peak…it’s enough to make you…puke.