Mortgage rates still falling

By John Duchemin
Advertiser Staff Writer

When mortgage rates dipped below 6.5 percent in Honolulu in fall 2001 — the lowest level in decades — the message from bankers and real estate agents was: "Buy a home now, because rates aren't getting lower."

They have been proven wrong.

Since April 2002, 30-year home mortgage rates have been dropping, dropping, dropping. The average 30-year rate in Hawai'i fell below 6 percent in early October, and below 5.7 percent in December.

A slew of surprises in 2001 and 2002 rocked the national financial markets that determine how much banks charge for home loans. As a result, interest rates have plummeted to their lowest levels since the 1960s and, barring drastic changes to the economic outlook, are expected to remain around this level for several months.

This is nothing but excellent news for Hawai'i homebuyers and sellers, bankers and real estate agents, who are all helped when interest rates drop.

"These are very attractive rates," said Michael Sklarz, Hawai'i-based chief valuation officer for Fidelity National Information Solutions, a provider of online real estate data. "Typically, the lower the rates you have, the more sales you have; real estate is a very credit-sensitive industry."

For home buyers, the benefits are simple: Lower interest means cheaper loans. A 30-year fixed-rate loan on a $300,000 home at 5.7 percent interest would lead to monthly payments of $1,740. At 9.7 percent — a level not unknown to Hawai'i borrowers — monthly payments would be $2,570.

Buyers also can afford more house at lower rates. Someone who could afford to pay $2,500 per month could afford a $293,000 mortgage at 9.7 percent interest. But at 5.7 percent, that person could afford a $431,000 mortgage paying $2,500 per month.

Home sellers benefit because buyers' increased purchasing power usually stimulates demand, leading to quicker sales and rising prices.

Homeowners who don't sell may nonetheless watch their wealth increase as property values rise. They can also renegotiate their home loans to take advantage of the lower rates, thus increasing their disposable income by hundreds of dollars per month.

All this happened in Hawai'i in 2001 and 2002. As the number of single-family home sales in Honolulu increased from a 12-month average of 284 per month in October 2001 to 315 per month a year later, the 12-month average for prices also rose from $297,000 to $329,000, according to Honolulu Board of Realtors statistics.

Homes are selling after an average of 26 days on the market, an all-time low, and 18.7 percent of sellers in December were able to sell their homes for more than the asking price, according to the Board of Realtors.

Many factors — an improved economy, relatively low home prices, an influx of luxury-home buyers from the Mainland — contributed to the surge, but the drop in interest rates was critical, experts say.

"Once rates got below 8 percent and then 7 percent, that released all the people who were sitting on the fence, wondering whether to buy or refinance or not," Sklarz said.

Though thousands of home buyers and owners have taken advantage of the lower rates to buy, sell or refinance, the market is nowhere near exhausted, bankers say.

"Now is the time that people who thought they had missed the low rates are saying, 'Gosh, I didn't miss them' — and they're getting into the housing market and seeing what they can do," said Carl Cunningham, vice president and mortgage banking sales manager at Bank of Hawai'i.

At First Hawaiian Bank, demand for new and refinanced mortgages is still strong, even though the bank's residential lending revenues set a record in 2002, said Vern Omori, senior vice president in charge of residential real estate.

"I don't expect it will be as good as last year, because a lot of people have already refinanced their homes," Omori said. "But still, I think it will be a very good year (for residential lending)."

Experts say home lending rates are likely to remain low, by historical standards, for many months. The only event likely to jar rates upward would be a sudden, surprising improvement in the national economy, said Paul Brewbaker, chief economist at Bank of Hawaii.

Brewbaker said economic improvement could put upward pressure on rates because of their relationship to the financial markets. Stocks usually rise on good news, causing some investors to move money from bonds to stocks. Increasing demand on the bond market would cause bond yields to fall, because people would be willing to pay relatively less for the stream of income resulting from a bond's interest.

Mortgage rates, which are pegged to the interest rate on 10-year bonds, would thus rise.

Brewbaker said this scenario is increasingly likely as the economy recovers from the post-Sept. 11 economic shock and last year's series of staggering revelations about financial misdeeds.

That means people wishing to lock in the lowest possible mortgage rate may have a relatively short window — unless a new war with Iraq causes the stock market to drop, Brewbaker said.

"With the continuing prospect of a widening war on terrorism, the markets may not be in a hurry to unwind from these low rates," he said. "But it's more of a gamble at this point — you could get caught by rates going up."

Reach John Duchemin at jduchemin@honoluluadvertiser.com or at 525-8062.

Correction: A previous version of the charts with this story was incorrect. In addition, the discussion of why mortgage rates have dropped should have noted that increasing demand for bonds would cause bond yields to fall.