Mortgage rates at record lows: Refinances are up. Sales are not.

By Mark Trumbull

Steadily dropping mortgage rates, which hit a record low 4.42 percent in numbers released this week, appear to be stimulating housing-market activity. Loan applications rose 13 percent in the week that ended last Friday, compared with the week before, says the Mortgage Bankers Association.

But the low rates so far are generating more interest in refinancing existing loans than in home-purchase transactions. The association's index of refinance activity rose 17 percent for the week, while an index of purchasing activity actually fell a bit.

Two factors could be holding back home buyers. First, many already pushed to make their purchases earlier this year, when they could tap a temporary $8,000 federal tax credit designed to spur home sales. Second, the weak job market and some signs of cooling in the economy this summer are affecting consumer purchasing power and confidence.

For people who can qualify for loans, moving forward now has a lot of appeal, some economists say.

"Houses are incredibly attractive buys now," says Paul Kasriel, director of economic research at the Northern Trust Co. in Chicago. But "a low mortgage rate doesn't mean anything if you can't qualify for it."

One reason it's tough to qualify is tighter lending standards by banks. Getting a loan requires navigating some hurdles. Another reason, affecting many who seek to refinance, is the number of US mortgages that are "under water," with the borrowers owing more to the lender than their homes are now worth.

Of course, real estate conditions vary a lot by locality. And many housing analysts say home values could fall a bit more before stabilizing.

Mr. Kasriel bases his general assessment of the market on a calculation of economic value: He uses interest rates as a gauge of the cost to buy a home, and he looks at numbers on implied rental yields as an indicator of the payback. (He divides national figures on "space rent" of housing by the market value of household real estate.)

For the first time since the mid-1960s, the yield on housing is higher than the typical mortgage rate on a single-family home, Kasriel finds. In the first quarter of this year, the implied yield on housing was 6 percent, while mortgage interest was about 5 percent.

Since then, mortgage rates have been falling steadily, to 4.42 percent in the latest weekly survey by Freddie Mac, released Thursday. That rate (for a fixed, 30-year mortgage) would come with fees and points equaling 0.7 percent of the loan amount.

Kasriel's calculation doesn't mean that homes have been a "bad buy" since the 1960s. But it's an indicator of affordability.

Another measure, the National Association of Realtors' affordability index, also shows that the financial appeal of housing may be at a four-decade peak. The affordability index blends data on home prices, household incomes, and interest rates into one number. The index shows that US homes were generally attractive buys in the 1990s and early 1970s, but much less affordable around 2005 (when home prices were soaring) or 1981 (when interest rates were sky-high).

Can you get a loan? Many banks that were handing out loans too easily during the boom five years ago may be overly reluctant to lend now. But the latest Federal Reserve survey of bank loan officers shows some improvement in lending conditions.

URL to Original Article: http://www.csmonitor.com/Business/2010/0820/Mortgage-rates-at-record-lows-Refinances-are-up.-Sales-are-not.