Homeownership at What Rate?
By Philip R. Wahl II
Good news and bad news about the U.S. housing market of late depends on the ability to borrow. The good news is that
the Federal Reserve System, through its purchase
of Freddie Mac and Fannie Mae mortgage-backed
securities, has provided would-be homeowners
with the opportunity to take advantage of the lowest mortgage rates in the country’s history. The bad
news is that applicants might not be able to qualify
because they are out of work ( 7. 7 percent unemployment last November) or because, if wanting to
refinance, they owe more on their residence than
it’s worth ( 13. 5 million underwater properties).
Deals seem ripe for the picking, according to
Freddie Mac’s Primary Mortgage Market Survey.
The average 30-year fixed rate was below 4 percent for all but one week in 2012 and, as of last
November, the weekly average stood at 3. 32 percent. The 15-year fixed-rate average hovered
around 3. 25 percent the first half of last year, was
less than 3 percent the second half, and came in at
2.64 percent at the end of November.
So, based on a 3. 32 percent 30-year fixed rate,
the principal and interest (P&I) payment on a
$200,000 mortgage computes to $878.11 per
month. Contrast that with July 2007, a few months
before the Great Recession began, at 6. 7 percent
and monthly P&I at $1,290.56 on the same
$200,000 mortgage. In other words, the savings of
$412.45 per month — 32 percent — means it’s a
great time to buy.
And to refinance. Based on a 30-year amortization at 6. 7 percent, a $200,000 mortgage originated in July 2007 would have a principal balance of
$186,667 at the end of last November. Factoring
in $4,300 for points, fees, and closing costs, a
15-year refinancing at 2.64 percent calculates to
$191,000 for the mortgage and $1,286.19 for the
monthly P&I. That’s $4.37 less per month than
the existing $1,290.56 P&I and a savings of more
than $149,000 versus the remaining payments on
the 30-year loan. Even if the July 2007 loan was
recalibrated into another 30-year fixed-rate mortgage of $191,000 at 3. 32 percent, the refinancing
still pays off: $838.60 P&I, equating to a monthly
payment savings of $451.96 and a life-of-the-loan
savings of some $80,000.
So where’s the bad news? Given the above, one
would guess that homes would be selling like gang-busters and that refinancing would be through the
roof. Neither is the case.
“According to the S&P/Case-Shiller Home
Price Index, since 2006, house prices have fallen
by more than 30 percent nationally and by as
much as 60 percent in some metropolitan areas.
Home equity has similarly declined, wiping out
$8.2 trillion in wealth held by individual households,” find Rachel Bogardus Drew and Christopher Herbert in “Post-Recession Drivers of Preferences for Homeownership,” an August 2012 report for the Joint Center for Housing Studies at
Harvard University. “Delinquency and foreclosure rates on home mortgages, meanwhile, have
reached levels not seen since the Great Depression,” they continue. “Under the weight of the
recession and several million completed foreclosures in recent years, the national homeownership rate declined from its 2004 peak of 69 percent to under 66 percent in 2011 — a level not
reached since the early years of the housing
boom” of 2000 to 2005.
Said another way: “The housing market remains
depressed by historical standards. New home sales
have reached an annual pace of 389,000, better
than the last two years but significantly worse than
any other year since 1963,” wrote Binyamin Appel-baum in The New York Times on Oct. 24. “And housing remains anchored to employment. People need
jobs to buy homes,” he pointed out.
“In addition, some five million borrowers who
are current in their payments have high-rate
mortgages that they have not refinanced, in part
because of excessive bank fees. In all, nearly
12 million borrowers collectively owe $600 billion
more on their mortgages than their homes are
worth, a loss of wealth and a load of debt that
make a strong and steady economic recovery all
but impossible,” declared a New York Times editorial entitled “The Mortgage Challenge” on Dec. 1.
The upshot, then? “The greatest potential for
recovery in the for-sale market lies in its historic af-
fordability for well-positioned homebuyers. The
dive in home prices and record-low mortgage rates
have made owning more attractive than in years.
But the availability of mortgage financing for
young buyers with limited cash, other debts, and
less than stellar credit is far from certain. Since the
market meltdown, underwriting has become much
more restrictive,” according to the executive
summary of The State of the Nation’s Housing 2012,
published last June by the Joint Center for Housing
Studies at Harvard. “So far, the Federal Housing
Administration and state housing finance agencies
have served a vital role in supporting low-down-
payment loans for homebuyers with all but the
lowest credit scores. But even FHA is now raising
its premiums to shore up its financial position and
to encourage the return of private capital to the
market,” it adds. “With key mortgage lending reg-
ulations still undefined, it remains to be seen to
what extent and under what terms lenders will
make credit available to lower-income and lower-
The Federal Reserve’s move toward purchasing
mortgage-backed securities, rather than Treasury
bonds, should keep mortgage rates lower longer,
enabling more households to purchase or refinance
homes. This move may be a positive but is not a
game changer. Without other changes, how many
more borrowers can benefit from rates that have
already been low for quite some time?
Philip R. Wahl II (Augusta State
University) is Augusta Market President
for Savannah River Banking Company
in Augusta, Ga. He earned a B.B.A. in
management from ASU and serves as chair
of the board of trustees of its foundation.
Other outreach includes being on the
school’s Hull College of Business board of advisors and on the
ASU-Georgia Health Sciences University Consolidation Working
Group. Wahl’s past chairmanships span the Augusta Metro
Chamber of Commerce, Augusta Convention & Visitors Bureau,
and the Downtown Development Authority of Augusta. Email
him at email@example.com.