Amid global economic woes and a struggling jobs market lies a silver lining: Mortgage rates have fallen to the lowest level in at least 40 years, giving the housing market a much-needed boost in Minnesota and across the country.
The rate for a 30-year mortgage is 3.62 percent, less than half of the historical average.
The rate reductions are helping shore up a still-battered housing market, which is ailing from a glut of foreclosures and depressed prices. Sales activity has risen in recent months, and the lower rates are providing some sustainability because borrowing is now much cheaper for buyers.
"It's just an incredible opportunity," said Frank Nothaft, chief economist for Freddie Mac, which tracks national mortgage rates.
Contractors, carpenters and other tradespeople are also seeing the benefits, as an increasing number of homeowners pull the trigger on home improvement projects funded by new mortgages with lower rates. "I don't think we'll see anything lower than this in our lifetimes," said Tom Snavely, who decided to refinance the mortgage on his Roseville house and build a new master bathroom.
Snavely considered moving to a different house, but he opted to stay put and renovate his existing one rather than sell at a discounted price. Plus, Snavely was able to shorten the term of his mortgage from 30 to 15 years without increasing his payment.
"We knew it was time to do something," he said, noting that he'd been delaying a refinancing because he thought he and his wife would eventually move. When they couldn't find the home they wanted, they decided to remodel.
Rates have slipped as international debt concerns and other global economic uncertainties have caused investors to seek Treasury bonds as a long-term safe haven. As bond prices rise, mortgage rates tend to fall.
The 30-year, fixed-rate mortgage averaged 3.62 percent, compared with 4.6 percent a year earlier. Rates on 15-year mortgages averaged 2.89 percent, down from 3.75 percent a year ago.
While low rates have helped the housing market, they haven't had the impact many would expect, Nothaft said. Twin Cities home sales are up by double digits so far this year, but options for buyers are limited because so many willing sellers can't list their homes until prices increase. Stricter documentation guidelines and a tighter credit market have also made it tough for borrowers to get mortgages
"Folks may not be happy with the amount of home they can currently qualify for, given stiffer down payment requirements," said Mark Vitner, managing director and senior economist for Wells Fargo Securities in Charlotte, N.C.
And low rates will be of little help to those who owe more than their house is worth because lenders won't refinance underwater mortgages. And the low rates will be available only to those with good credit.
As of last week, mortgage applications nationwide had fallen 6.7 percent from the previous week, according to the Mortgage Bankers Association. Refinancings continue to represent the bulk of all mortgage applications, though the refinance share of mortgage activity fell to 78 percent, a slight decline from previous weeks. Twin Cities-area loan officers say business is up across the board, but many would-be borrowers aren't taking advantage of low rates. The issue isn't that money is in short supply. Lenders want greater documentation and bigger down payments from borrowers.
"Overall, it's laws which preclude us from loosening up," said Kris Wilson, a senior loan officer with Fairway Home Mortgage, referring to recent federal regulations aimed at preventing the kind of reckless lending that led to the housing bust.
Brian Call of Rubicon Mortgage Advisors said that purchase activity is up 114 percent so far this year compared with 2011.
"The challenge is properly balancing resources," he said, referring to increasing demand for appraisers, settlement agents and others as application volumes increase.
Homeowners such as Chad Heer are seizing the moment and taking advantage of the cheaper financing. When he bought his first house several years ago, a 7 percent rate was a good deal. But as rates continued to fall, breaking one record low after another, he decided to build an addition on his St. Paul Highland Park home and refinance the project under a low-rate mortgage. "This is half of what we've paid before," he said, marveling that his payment will be lower even after paying for the addition.
Lenders are divided about whether the rates will continue to fall or begin to inch up. Heer, a commercial real estate broker with Re/Max, said he wasn't going to take any chances.
"The fact that the rates are so low prompted us to get this done as soon as we could."
Jim Buchta • 612-673-7376