New Homes Construction Stable: Refinancing Up

With the economic outlook somewhat gloomy, it is somewhat surprising to learn that privately-owned single-family housing starts in September, 2001 were at a seasonally-adjusted annual rate of 1,268,000, up slightly from 1,196,000 a year ago. The explanation, of course, resides in the lowest mortgage interest rates in a generation. For the week ended October 19, the interest rate on 30-year fixed-rate mortgages dropped to 6.59 percent. The average rate on 15-year mortgages dropped to 6.91 percent, 151 basis points below last year's average rate. Robert Van Order, chief economist for the Federal Home Loan Mortgage Corporation (Freddie Mac), has been quoted as saying that if mortgage rates remain at their current levels for the rest of 2001, the average interest rate for the year will be at the lowest level in 30 years.

Falling interest rates also accounts for the boom in the refinancing of home mortgages during this past year. In his article in the New York Times, Edwin McDowell cites a report from Merrill Lynch saying that consumers could save up to $70 billion in mortgage interest by their refinances this year. According the Mortgage Bankers Association, applications to refinance existing mortgages accounted for three-fourths of all mortgage applications during the week ending October 19. For many homeowners, this is not the first time that they have refinanced their existing mortgages.

While the surge in refinancing home mortgages is based largely on the decline in mortgage interest rates, it has also been spurred by greater sophistication in the market. A number of lenders, realtors, mortgage lenders and brokers provide Web sites that homeowners can use to determine how much lower their monthly payments might be or how much the remaining maturity of their loans could be shortened by refinancing. (How many high school math books use mortgage refinancing as an example of applied arithmetic?)