NEWS - Residential Real Estate

SBJ Special Report

The financial crisis in Europe may make it easier for Americans to buy a house or to refinance, at least for those who can get credit to do so. Domestic mortgage rates are now at their lowest levels of 2010 and very close to the lowest levels seen in 50 years.

Rates on 30-year mortgages averaged 4.84% last week, according to a survey by mortgage-insurance titan Freddie Mac. Rates were quoted late Friday at 4.86%, the lowest since December 2009, according to a survey by financial publisher HSH Associates, and down from a high of 5.27% for the week ended April 9. Rates on 15-year mortgages averaged 4.24% last week—the lowest since Freddie began its survey in 1991.

The end of the Federal Reserve’s $1.25 trillion mortgage-securities purchase program this month was expected to trigger a rise in mortgage rates. Now, some analysts say rates could dip as low as 4.5% this summer instead of rising to 6% as some had originally forecast.

Refinance business "exploded" last week, according to Jeff Lazerson, chief executive of Mortgage Grader, a brokerage in Laguna Niguel, Calif. He told the Wall Street Journal "it's schizophrenic. We all had this expectation of higher interest rates and no more refinances."

Economists largely attribute the decline in mortgage rates to the European debt crisis and new concerns about the global economy, which unleashed a massive wave of cash into U.S. bonds from investors around the world.

This buying pushed down yields on Treasury bonds. Because mortgage rates are closely pegged to yields on 10-year Treasury notes, which fell to 3.2% Friday, the decline in Treasurys pulled down mortgage yields. Typically, mortgage yields remain around 1.5 percentage points above yields on 10-year Treasury notes.

It remains to be seen whether the drop in rates will spur a new round of home buying or mortgage refinancing. Demand had fallen in recent weeks after buyers raced to close sales ahead of last month's expiration of an $8,000 federal tax credit for home purchases. Applications for new-purchase loans hit a 13-year low in the week ending May 14, according to the Mortgage Bankers Association.

Borrowers do face roadblocks. Underwriting standards are their strictest in a decade, and record numbers of borrowers are "underwater," owing more to the bank than their homes are worth. That has excluded large swaths of borrowers from getting loans at the new lower rates.

Still, lower rates could widen the pool of people who qualify for a mortgage, while others may find they qualify for a slightly larger loan. "They can buy the place with the extra bedroom or the swimming pool," says Jay Brinkmann, chief economist at the Mortgage Bankers Association.

By historical standards, rates are incredibly low. Until 2003, rates on 30-year fixed-rate loans hadn't dipped below 5% since the 1960s. Rates fell to similar points throughout much of the past year as the government was helping to hold down costs for borrowers.