The benchmark 10 year note yield is back below 3.00% and mortgage rates are at lifetime lows.  Hello homeowners!  Why isn’t everyone (who can qualify) jumping on the refi band wagon?   With rates so low and home prices off 30% to 40%, why aren't consumers rushing to buy homes?  If this was a normal market,  mortgage activity would be bursting at the seams.  Is the glass half full or half empty?

Let’s take a look.

Glass Half Full

Low Rates: As we noted above, interest rates are at historical lows and probably won’t move significantly higher in 2010. It seems Treasuries are the only place to park funds that ensure no degradation of principal.  However, eventually rates will rise as employment levels improve and the U.S. government is forced to compete with the private sector for investment capital.  Consumers should be taking advantage of low rates while they can right now.
High Affordability Index:  According to the National Association of Realtors, the Housing Affordability Index has rising from 115.4 in 2007 to 174.8 for the first quarter of 2010.  The rise is a whopping 51% over the last 3 years.   With home prices off 30% or more from the highs and the tax benefits of deducting interests on mortgages, there are incentives to buy a home.

Demographics:  US population continues to grow at just under 1% per year.  As the population grows, housing demand should increase.  More housing demand means higher demand for mortgages.

Government Support for Housing:  Congress and the President are committed to supporting the  housing market.  They stepped in to take over the GSEs and have provided liquidity in the secondary mortgage market.  Tax credits helped stimulate housing activity and there is policy to help homeowners with foreclosures.

Glass Half Empty...

Unemployment and Underemployment:  The Labor Department reported this month that there are 15 million Americans that are unemployed (just under 10% of the working population).  Even worse is the underemployment rate – those that are working, but at wages below what they made before – which is over 19% according to the Gallup’s underemployment rate.  Reducing  unemployment rate back to 5% by  adding 150,000 jobs per month  would take over 4 years. 

Limited Secondary Mortgage Market:
  The US government owns and operates the secondary mortgage market today and there is little secondary market for non GSE/GOV loans.  Borrowers looking for jumbo loans have limited options.  

Tight Credit Standards
:  Because of the mortgage meltdown and high foreclosure rate, credit guidelines have tightened dramatically.  Alternative loan programs such as stated income loans don’t exist today.  This is problematic for some borrowers looking to purchase a home, but more importantly, borrowers seeking to refinance out of alternative loan program can’t qualify under the tighter credit standards.   

Foreclosures:  As the economic malaise continues, more and more A-paper borrowers, that have lost their jobs and seen the value of their homes decline, are throwing in the keys and walking away.  This is sad and adds more fuel to the fire, causing property values to drop further.

Being in the mortgage business for over 40 years, I’ve seen the ebbs and flows in our industry.  Nothing lasts forever.  Eventually, job formation will escalate; liquidity will increase in the secondary mortgage market; credit guidelines will become more lenient; and housing activity will increase.