MADISON, Wis. – Is the mortgage bubble lenders have enjoyed over the past year deflating? Does a down swing in existing home sales for the first time after months of record highs portend an economic recession? Following four months of the highest months on record for existing home sales – January, February, April and May, 2002 – sales of existing single-family homes in June dropped 11.7% to 5.07 million units, 4.3% lower than the 5.30 million unit level in June 2001. Just one month prior, in May, existing home sales were at 5.74 million units. CUNA Senior Economist Steve Rick said the reversal was bound to happen. "Throughout the economic slowdown we've seen over the past several months, the housing market has been the one bright spot that has supported the economy. Low interest rates, a volatile stock market and a modest increase in personal income over the past year or so made buying a home or refinancing an existing one a good investment. But now there are not that many people left to purchase or refinance their homes," said Rick. Rick said typical home appreciation rates are the rate of inflation plus one-to-two percentage points. Appreciation rates last year were in the 7 to 9% range. He characterized the mortgage activity credit unions and other lenders enjoyed over the past several months "an aberration because of exceptionally low interest rates." While lenders enjoyed record sales figures, it was just a matter of time before the curve shifted in the other direction, said the CUNA economist. Rick offered that many of the consumers who refinanced or purchased a home in the past year were those who would have probably done so in a few years but because of the interest rate environment, coupled with other factors, they decided to do so now. He called this "borrowing from the future." "There are just not that many people left to refinance or take out a first mortgage," said Rick. Lou Jennings, executive vice president of mortgage operations for Navy FCU isn't so ready to seal the envelope on the first mortgage market yet. He said he prefers to look for trends based on several months' activity, rather than one month's reporting. "There are still a lot of people out there who haven't refinanced their mortgages yet and will still do so, or if they have they'll do it yet again," he said. Still, even the leading CU mortgage lender has started to see a change in its members' mortgage borrowing behavior. "I can attest that Navy FCU's mortgage volume has shifted," said Jennings. Up until mid-June, first mortgages accounted for about 75-80% of our mortgage activity, but it's slowly started to turn, and now we're seeing that while new purchase loan transactions continue to be high, the majority of the new business we've been getting has been in refinancings." Jennings said he isn't surprised to see the high number of refis that have been coming through Navy's doors. Members, he said, are no longer waiting for interest rates to drop two or three points before applying to refinance a mortgage the way they used to. Now they're refinancing when interest rates drop a quarter or half a point. "It isn't just a matter of what they can save on their monthly mortgage loan payments, but how they can cash out and use the loan towards other things," Jennings said. Having said that, Jennings emphasized that, "Consumers aren't going to lose confidence in housing. Real estate is still considered to be the best investment." In fact, even as first mortgage numbers dropped, mortgage rates dropped to new, record lows the week of July 22. According to Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed-rate mortgage averaged 6.34%, with an average 0.6 point – the lowest the 30-year first mortgage rate has been since Freddie Mac began tracking the figure more than 30 years ago – for the week ending July 26, down from 6.49% the previous week. Last year at the same time, the 30-year fixed mortgage rate average was 7.03%. But even the record low mortgage rates the market is enjoying may eventually turn up. Rick pointed out that the low rates are being driven by the good prices Freddie Mac and Fannie Mae are offering their bonds at. "Once consumers' faith returns in corporations and the stock market, consumers will once again start buying corporate bonds," he said, and that will drive interest rates up again. -

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