Homeowners tap equity as mortgage rates continue to dip
By Thomas A. Fogarty
USA Today
The average interest rate on a 30-year mortgage has edged below 6 percent for the first time since the 1960s.
Freddie Mac reported yesterday a 5.99 percent average rate for the benchmark mortgage. It's the lowest in 31 years of tracking by the giant mortgage investor and compares with the kind of rate last available 40 years ago. This week's 5.41 percent average for a 15-year mortgage is a new low, too.
The new numbers continue a remarkable slide in home finance costs that began in July, when the average 30-year rate was 6.57 percent. The decline means that the monthly payment on a new $200,000 mortgage today is $76 less than on the same loan taken out July 1.
The interest rate slide has unleashed the greatest torrent of home refinancing ever.
Cheap borrowing and high home values have enabled millions of Americans to tap home equity by taking cash out of a refinancing deal or through a second mortgage.
Investment bank UBS Warburg estimates about $200 billion will be drained from home equity this year and used for consumer spending, investment or reduction of high-interest credit card debt.
The decline in mortgage interest rates also has propped up the market for homes.
The latest evidence: The Census Bureau reported yesterday that new homes sold during August hit a record high annualized rate of 996,000. That's up 1.9 percent from the pace in July. The news followed a report Wednesday of a strong but slightly declining market for resold homes in August. The 5.28 million August sales rate for existing homes remains strong enough to keep 2002 on track to possibly become the biggest year ever for home sales.
"With mortgage rates this low, it's hard to have a bad housing market," Freddie Mac economist Robert Van Order says.
The low mortgage interest rates are the result of money flooding the bond market, where the capital for most home financing originates.
Worries about a war in Iraq, a lousy stock market and a disappointing rate of economic recovery have caused investors to flee to the safety of bonds. The 10-year Treasury note, a benchmark for pricing fixed-rate mortgages, has been yielding less than 4 percent, a 40-year low.
Van Order says forward-looking measures of housing — such as mortgage applications and housing starts — suggest a "leveling off" in the market.
But economists marvel that the market is staying strong even as consumer confidence fades and the labor market muddles along. In effect, they say, low mortgage rates alone are fueling a housing market that formerly had several strong economic props.
When interest rates start to move upward, economists say, the housing market will cool. But relatively tight supplies of homes for sale and population trends that assure a steady stream of likely buyers portend a soft landing for most local markets.
Interest rates are likely to stay low until consumer confidence and employment pick up strongly, developments that could blunt the negative effects.
