Mortgage Rates Are Still Dirt Cheap

Mortgage rates have skyrocketed over the past few months. Just one week ago, they set a record for the largest single-day increase in history, leading industry experts such as Matthew Graham, chief operating officer of Mortgage News Daily, to characterize it as a "catastrophic surge."

The impact on the mortgage market can't be denied. At the end of last week, the nation's largest mortgage originator, Wells Fargo (NYSE: WFC  ) , reported that its mortgage refinancing volume had fallen by 23% in the second quarter compared with the same time period last year. And industrywide, data from the Mortgage Bankers Association estimates that the same figure is down by more than 50% since peaking seven months ago.

But what does this mean for prospective homebuyers? In a word: nothing, or at least, much less than one would instinctively conclude.

Even though mortgage rates have vaulted higher, the monthly payments on a $250,000 30-year fixed-rate mortgage remain historically low. At today's rates -- roughly 4.5% -- the monthly payment would be an estimated $1,266. That's 34% smaller than the average since 1976. In other words, mortgage rates are still dirt cheap. For an additional take, click here.

The low rates have been an important boost to homebuilders. At the end of May, the nation's largest builder of luxury homes, Toll Brothers (NYSE: TOL  ) , announced that it sold 38% more units in the three months ended April 30 than it did in the same quarter last year. That news was followed up last month by the third-largest builder, Lennar (NYSE: LEN  ) , which reported that its quarterly deliveries shot up by 39% on a year-over-year basis.

This has also been good for the market overall. On Friday, the S&P 500 (SNPINDEX: ^GSPC  ) closed at a new all-time high of 1,680. How much of the boost is attributable to the housing recovery? While it's hard to pinpoint the precise impact, the one thing we do know, as my colleague Morgan Housel recounts, is that "it's important enough that there hasn't been a strong economy without a strong housing market in modern history."

In sum, while many prospective homeowners may have missed the opportunity to buy a house when mortgage rates were lower than they've ever been before, it's important to remember that, the past few months aside, they're still at historical lows. Thus, if you're inclined to buy a house, now is as good as time as ever to go ahead and do so.

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  • Report this Comment On July 14, 2013, at 5:10 PM, jmeats wrote:

    First common sense thing I have heard in a while about mortgage rates. We are spoiled. Mortgage rates are still at the lower end of the spectrum that they have been my entire adult life (35 years). There was a time when getting a 9% rate was considered awesome!

  • Report this Comment On July 14, 2013, at 9:53 PM, JLeBlanc09 wrote:

    I am so sick of hearing about how mortgage rates are "so cheap." The classic response to the increase in rates right now by people 40+ is "when I was purchasing my house, interest rates were 15% so you're lucky they are so low right now." Well, to put that comment into perspective - the asking amount for those people at the time interest rates were 15% was most likely between $25,000 and $45,000. Yes, that's right. No, I didn't leave any zeros off of those numbers. Interest rates HAVE to be so low right now, otherwise people are going to lose their shirts and the kitchen sink if they go back up to 8% or 15% for that matter. Banks are playing off the "well 10 years ago interest rates were 15%" sell. Well, banks - we aren't stupid. And yes, this article was insinuating that interest rates are dirt cheap. Well that is because houses are so expensive. Wait until the baby boomer generation all decide to sell their houses at the same time; talk about a bubble bursting. Can't wait for all that supply and so little demand.

  • Report this Comment On July 16, 2013, at 12:29 AM, duke84043 wrote:

    That is very true about the prices of homes being between 25k and 45K, JLeBlanc09, and those would go for 3-4 times more, but you also have to consider that the average worker makes about that much more per year as well, so it's all relative. My parents bought a house in 1979 for 79,000 and paid a 13.9% rate, but my father was also only making about 20-25K per year and the same job now would pay him over 100K per year. In 1980, the per capital person income was only 9,309 but in 2010 it was 37,905, so just about 4x the amount. Looking at my father's salary in 1979, the house payment my parents made was almost 35% of their monthly gross income. The same house in the same market today would go for about $250,000. The same house purchase, with 20% down (previous was calculated with the equivalent 20% down), at 4.5% would give us a payment of about 1013.37/month. Let's say the income had only gone up 2.5X, and not even as high as the price of the home had risen. The monthly payment would only be about 20% of the monthly gross income.

    So, the 4.5% rates are "historically low" and still dirt cheap. You need to look at all factors when considering this.

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