The Wall Street Journal

7 February 2014

Average mortgage rates fell to the lowest level since mid-November last week as unease over economic growth in the U.S. and market turmoil abroad prompted investors to load up on government bonds, pushing down long-term interest rates.

The average rate on a 30-year fixed-rate mortgage was 4.47% last week, down from 4.52% the week before, the Mortgage Bankers Association said Wednesday. Mortgage rates are tied to yields on 10-year Treasury note, which closed at 2.64% on Tuesday amid market jitters.

But the modest decline in mortgage rates hasn’t yet been enough to trigger any meaningful gain in home-loan refinancing. Applications for refinances were up 3% from a week earlier but remain at extremely low levels.

Market strategists say that rates would need to ease to about 4% from their current levels in order to provide any lift to refinancing. Rates remain more than a percentage point above their lows of May 2013, when they fell to 3.6%.

“We are eyeing 4.0% on the primary mortgage rate to be a bellwether for increased originator supply,” said Walter Schmidt, an analyst at FTN Financial in Chicago, in a note on Wednesday morning. Refinances accounted for 62% of loan applications last week, which was unchanged from the prior week.

The Mortgage Bankers Association estimates that refinance volume will total about $440 billion this year, down from $1.1 trillion last year. That would be the lowest level of refinancing since 2000.

Mortgage rates jumped more than a percentage point last June as investors grew anxious over the Federal Reserve’s plans to unwind its unprecedented bond-buying campaign. The rise in rates ended an unusually long refinance wave that had generated huge profits for U.S. banks. It also led to a pullback in home sales during the fall.

Mortgage applications for home purchases fell 4% last week on a seasonally adjusted basis and stood 17% below their year earlier levels, a grim indicator of falling demand for homes. The small declines in rates in recent weeks could serve as a tailwind to the housing market as the spring buying season gets underway in the coming weeks.

Banks may be able to see refinancing drop by a smaller-than-expected margin if rates stay low and more borrowers find that rising home prices have restored equity, making it possible to refinance. Many borrowers have been shut out from refinancing because their homes have dropped in value, though a series of government programs have enabled more borrowers to refinance. But analysts don’t expect refinance volumes to come anywhere close to their levels of the past few years.