Lower Mortgage Rates Could Raise the Roof on Sales, Prices

With mortgage rates tumbling Thursday to the lowest level in more than three decades, even more buyers are expected to be drawn into the tight, competitive Southern California housing market and perhaps push prices to new records.

The average rate on long-term mortgages edged down Thursday to 5.99% from 6.05% last week, Freddie Mac reported. Borrowing costs for 30-year loans have fallen to the lowest point since 1965 when rates were at 5.83%, the secondary mortgage investor said.

Thursday’s cut marked the seventh new low for mortgage rates since November. The falling rates have prevented more people from being priced out of the housing market by rapidly rising prices, said Robert Bailey, president of the California Assn. of Realtors.

The slight decline is expected to keep Southern California sales churning steadily, particularly for entry level buyers, analysts said.

When measured in August, the supply of homes for sale in Orange and Los Angeles counties would have lasted less than three months if no more came on the market. A nine-month supply is considered healthy, the Realtors group said. Median home prices, meanwhile, rose in August to a record $370,000 in Orange County and to $267,000 in Los Angeles County as the tight supply encouraged bidding wars.

For KB Home, one of the nation’s largest homebuilders, cheaper financing is expected to allow more consumers to choose costlier upgrades for their new homes. Buyers now will be more likely to choose a two-car garage, for instance, rather than a smaller one, said Dom Cecere, chief financial officer of the Los Angeles company.

“It gives them more flexibility to put into a home what they could not have afforded before,” Cecere said.

The lower rates also are expected to cause more consumers to refinance their home loans, further clogging the busy mortgage system. In Southern California, the pace of refinancing during the first half of the year surged 41% to 538,496 compared with the same period in 2001, according to DataQuick Information Systems Inc., a real estate research firm.

And Doug Perry, a first vice president at Countrywide Credit Inc. in Calabasas, expects to see people who reworked their home loan in the last six months to 18 months to refinance again with rates falling below the 6% benchmark.

“We’ve crossed a psychological barrier that will pique consumer interest,” he said. “The Southern California market remains very strong for both refinancing and purchasing, and I think this shows there is no end to this in sight.”

About 34% of Californians have been paying off their mortgages early, a pace that leads the nation and shows how quickly refinancing has been taking place, according to a new report from LoanPerformance, a San Francisco firm that tracks mortgage data.

All six counties in Southern California were rated in the top third of areas surveyed nationwide, and seven California markets ranked in the top 10.

Mortgage rates also declined slightly for 15-year fixed rate mortgages to an average of 5.41%, and one-year adjustable home loans fell to 4.22%. Those loans carried add-on fees of 0.6% this week, Freddie Mac said.

The Freddie Mac average rate is widely quoted, but other mortgage benchmarks already had fallen below the 6% threshold.

A 30-year loan index tracked by the Mortgage Bankers Assn. fell to 5.85% last week from 5.90% the previous week.

Borrowers can find conventional loans at even lower rates if they’re willing to pay upfront “points.”

Mortgage rates track yields on long-term Treasury bonds. Treasury yields have plunged to 40-year lows in recent months as investors have fled the stock market for safer havens.

The yield on the 10-year Treasury note, the principal benchmark for the mortgage market, hit a generational low of 3.64% on Tuesday, down from 4.14% at the end of August.

On Thursday the T-note yield edged up to 3.77%. Though many analysts have warned that Treasury yields--and mortgage rates--could quickly rebound if the U.S. economy begins to show more strength, others say demand for Treasuries may remain strong because investors fear a U.S.-Iraq war and a generally weak global economy looking into 2003.