Mortgage rates plunge, but little boost for housing

Mortgage rates reached a national average of 4.45 percent for a fixed, 30-year loan. But the near-record lows in mortgage rates are not boosting home sales.

The one positive in all the uncertainty surrounding the nation's debt was a plunge in Treasury yields, which in turn sent mortgage rates to record lows.

The 30 year fixed hit a near-low of 4.45 percent last week from 4.57 percent, and the 15 year made a new low of 3.52 percent, according to the Mortgage Bankers Association. Those low rates pushed refinance applications up 7.8 percent and purchase applications up 5.2 percent (both seasonally adjusted).

So are we housing geeks now jumping for joy? All good? Maybe not so much.

"Refinance application volume increased, but even though 30-year mortgage rates are back below 4.5 percent, the refinance index is still almost 30 percent below last year's level. Factors such as negative equity and a weak job market continue to constrain borrowers," notes the MBA's VP of research and economics, Michael Fratantoni. "Purchase activity increased off of a low base, returning to levels of one month ago, but remains weak by historical standards."

So even ridiculously low rates are not exactly boosting the housing recovery; that's because rates have been historically low for a while.

"The problem is not the price of credit," says economist Paul Dales at Capital Economics. "The key issue is that the high unemployment rate, tight credit criteria and high share of homeowners underwater on their mortgage are all keeping a lid on demand regardless of the price of credit. With the economy now weakening once again, these constraints are not going to go away soon."

This is why Dales sees home prices weakening further, and we see that in data today from CoreLogic. Home prices were down 6.8 percent in June year over year, if you include distressed sales (foreclosures and short sales). That is a slightly deeper fall than May's annual number. Without distressed sales, home prices were down 1.1 percent in June annually. That's a bit better than the 2.1 percent annual drop in May. Of course you have to remember that distressed sales make up more than a third of the housing market right now, and far higher percentages in certain local markets.

"The improvement [in home prices month-to-month] is largely due to distressed sales accounting for a smaller share of overall sales," notes Dales. The Realtors reported 30 percent of sales in June were distressed properties, but that share drop is only due to a gain in regular sales, not the actual number of distressed properties decreasing.

So back to where we started, do these lower mortgage rates provide any help to the housing recovery? Perhaps in the refinance area, as some borrowers can get lower monthly payments and lower their risk of default; the trouble with that premise though is that the borrowers who are in real trouble are likely also underwater on their mortgages and unable to qualify for a refi at these low rates. Most people who can do the easy refi already have.

The bigger issue going forward is new banking rules currently under debate which could raise the cost of lending, which would then be passed on in the form of higher interest rates. These risk retention rules (known as QRM or "qualified residential mortgage" standards) just reached their final comment period this week. So this is coming down the pike. I guess the lower the starting point, though, the better.