Bruce Duclos, Senior Vice President and Division Manager, Mortgage division
Anthony Valeri, Investment Management Director for Wealth and Fiduciary Services
During this difficult economic period, the near-record-low mortgage rate environment presents an opportunity for businesses and consumers to purchase properties or lower their monthly expenses with a reduced mortgage payment. Rates have been low for many years, so how do you determine if now is the right time to make a purchase you have been thinking about or refinance?
To explain the mortgage environment during the pandemic, we asked Bruce Duclos, California Bank & Trust Senior Vice President and Division Manager of California Bank & Trust Mortgage
and Anthony Valeri, California Bank & Trust Investment Management Director for Wealth and Fiduciary Services, to review current conditions and advise how you should assess your opportunities.
We have seen stability in the market with continued demand for properties without the significant weakness in housing seen in 2008 and 2009. Rates are at the lowest since 2012.
The low-rate environment presents an excellent opportunity to acquire a new property or refinance existing loans. As the U.S. Treasury issues more bonds, there may be upward pressure on interest rates later this year.
It may be a good time to revisit your mortgage because the market is favorable for many borrowers. However, businesses and consumers with mortgages initiated in late 2012 or mid-2016 (the last two time periods when mortgage rates were this low) may not see enough savings to benefit, particularly if refinancing extends the maturity of a loan.
“Refinancing provides an opportunity to improve your personal financial situation and lower your monthly costs. It’s worth looking at your mortgage, particularly if you have not revisited your rate over the past several years.”
--Anthony Valeri, Investment Management Director for Wealth and Fiduciary Services
Rates on U.S. Treasury bonds have declined to record lows in response to the COVID-19 pandemic and the subsequent interest rate cuts by the Federal Reserve. Initially, mortgage rates failed to match the decline in U.S. Treasury rates due to bottlenecks and disruptions from the pandemic. However, these pressures have since subsided and closed the gap between mortgage rates and Treasury yields. As a result, property owners need to keep in mind that further declines are likely to be limited to approximately 0.25%. Rates are likely as attractive as they are going to be.
Interest rates are likely to stay low for some time. Economic recovery from the coronavirus will be gradual and the Fed is unlikely to raise rates anytime soon.
Our research shows that once the Fed starts to lower interest rates, they remain low for an average of four years. This low-rate trend, following a financial crisis, has been as short as one year and as long as nine years. The current rate cut cycle began in June 2019, so you may have some time to take advantage of lower interest rates.
However, this economic shock is different, and owners and buyers may not want to delay a purchase or a refinance. The effort and global coordination to find medical treatments for the virus are progressing and may lead to effective treatments. If that’s the case, the economy may rebound and nudge interest rates higher. Additionally, bond issuance to help fund the extensive government stimulus will increase later this year and may exert upward pressure on interest rates.
The housing market may have weakened in March and early April in response to COVID-19 closures, but since mid-April, buyers have returned as restrictions are lifted.
“The shelter-in-place orders caused a sharp drop in activity and home prices tend to fall during periods of recession,” Duclos said. “The offset is that in areas of high demand such as California, the impact may be less than other areas of the country.”
Valeri also echoes that the pace of home price gains may slow, but as the economy slowly improves and rates stay low, prices should remain relatively firm.
“Record low interest rates and low inventory should continue to support housing prices and limit weakness, if any,” he said. “Mortgage purchase applications have steadily increased from mid-April through early June, showing that home buyers are taking advantage of low interest rates. Although still early, data shows only a limited impact to housing prices with prices still up 5% to 7% year-over-year through April, the latest month for which data is available.”
Certain mortgage-related bonds sectors are not eligible for the Fed’s alphabet soup of special lending and purchase facilities. There are growing calls for the Fed to address bond market weakness for non-government eligible mortgages. If the Fed addresses these situations, improved liquidity could bring rates lower—or facilitate greater access—for certain residential mortgages such as jumbo or non-conforming loans.
“Applying for a new loan and refinancing has never been easier thanks to the digital platform. It is now simple to apply and track your loan.”