Cheaper Mortgages Could Spur Housing Market

By Laura Kusisto Features Dow Jones Newswires

Mortgage rates dropped below 4% for the first time since November, providing more kindling to an already hot housing market as the crucial spring selling season gets under way.

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The average rate on a 30-year fixed-rate mortgage dropped to 3.97% for the week ended April 20, from 4.08% a week earlier and 4.3% in mid-March, according to data released Thursday by mortgage company Freddie Mac.

The drop could help encourage buyers who had been put off by rising mortgage rates to dive into the market and prompt others to rush to buy homes before rates rise again.

"We are in the spring, and people are out looking to buy homes," said Len Kiefer, deputy chief economist at Freddie Mac. "These low rates are really going to help out with affordability."

For most of 2016, mortgage rates, which generally move together with yields on the benchmark 10-year U.S. Treasury note, hovered just above 3.5% for the 30-year fixed-rate mortgage.

After the November election, optimism that the U.S. economy would get a boost from Republican plans for a tax overhaul, increased infrastructure spending and reduced regulations helped drive interest rates sharply higher as investors bet on faster growth.

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But the tide is turning. Treasury yields, which move in the opposite direction of prices, approached a five-month low last week as many investors worried that turmoil in Syria and North Korea, as well as election uncertainty in France and the lack of progress on tax and spending policy under President Donald Trump, would lead to slower economic growth in the months ahead.

"Almost the entirety of the Trump bump [to mortgage rates] has been washed away," said Keith Gumbinger, a vice president at HSH.com, a mortgage-information website.

That, in turn, could spur the housing market, economists said. A decline in mortgage rates can reduce monthly mortgage payments or allow buyers to purchase more expensive homes than they otherwise could afford.

Economists said a surge of additional buyers this spring wouldn't be entirely welcome. "It's driving more demand into a market that doesn't have much in the way of supply," Mr. Gumbinger said.

U.S. home prices rose 5.9% in the 12 months ended in January, the fastest rate since mid-2014, according to the S&P CoreLogic Case-Shiller Indices. Data for February are due Tuesday.

The impact of a decline in mortgage rates of about a third of a percentage point would be relatively small in many areas of the U.S. The monthly mortgage payment for a home at the median price of $236,400, assuming a down payment of 20%, would be about $50 less today than a month ago.

The effect would be much more pronounced, however, in high-cost markets, such as California. Monthly mortgage payments would decline by about $100 for buyers purchasing homes of about $600,000. At the same time, the size of a mortgage that such buyers could qualify for could swell by about $25,000, according to Black Knight Financial Services, a mortgage and real-estate technology and data provider.

Lower mortgage rates also could provide a small boost to refinancing activity. The number of U.S. homeowners who could save enough to make refinancing worthwhile has jumped 46% to 4.1 million, from 2.8 million last month, according to Black Knight.

Still, analysts expect the impact on refinancing to be relatively small. The vast majority of homeowners have had ample opportunity already to refinance at rates of less than 4%, given the roughly 3.5% rate for most of 2016.

Economists said the 30-year fixed-rate mortgage would need to drop below 3.5% to have a significant impact on refinancing and purchase activity.

Many of them say that is unlikely given that the Federal Reserve is likely to raise short-term interest rates twice more this year, which in turn could fuel an uptick in mortgage rates, economists said.

On the other hand, continued uncertainty in Syria, North Korea and France or a failure by Republicans to deliver on promised tax overhaul and economic growth could help keep rates lower.

"It's as volatile as it's ever been. There are a lot of serious crosswinds happening. It's a very political market," said Steve Udelson, president of Owners.com, an online real-estate brokerage.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

April 23, 2017 07:14 ET (11:14 GMT)