After rate reduction, Idaho’s economy in wait-and-see mode

The Idaho economy stands to benefit from a recent drop in residential mortgage interest rates to record lows, market participants in the Boise area said.

The Mortgage Bankers Association reported that the annual interest rate on 30-year, fixed rate mortgages fell to 5.19 percent for the week ended Dec. 19 – the lowest rate in the 37-year history of its survey – from 5.47 percent a week earlier.
“Yes. If nothing else, you’re positively affecting our entire economy,” said Roger Wood, owner-broker at Winston Commercial Real Estate Services, a Boise firm that specializes in commercial land purchase and sale transactions. “Just by that, and through trickle-down, it helps the commercial side of the business.”
More households would refinance, improving their monthly cash flows and benefiting the economy, he said.
Reduced interest rates quicken the deal flow in the land purchase-sale market eventually, Wood said. A doctor who plans to build and own a small office building may have money in hand for a down payment and a loan approved, “but the difference in monthly payment may make a difference on whether he can do it now or must wait.”
Owner-occupant buyers as well as investors would benefit from reduced interest rates, he said.
Alison Gillispie, vice president and manager of the mortgage department at Boise-based Idaho Banking Co., said the interest rate on a 30-year, fixed-rate mortgage was close to 4.9 percent late Dec. 29 for a purchase transaction, after opening at 4.875 percent. Rates have settled lately after ranging from 4.25 percent to 5.125 percent Dec. 17, the day after the Federal Reserve Board cut the overnight bank-borrowing rate to 0.25 percent.
“Honestly, December felt like we were back in 2006,” she said. The number of mortgage applications slated for closure increased by nearly four-fold from November to December 2008 at Idaho Banking Co., she said.
Volume took off after the rate dipped below 5 percent – a level that made refinancing attractive to many homeowners who have mortgages in the “high 6 percent” range, Gillespie said. Refinancing comprises about 70 percent of the bank’s recent volume.
Money remains available, contrary to many media reports, she said. Grant programs are still available for down payments and for closing-cost assistance, and Idaho Banking Co. is still able to sell mortgages in the secondary market, she said.
The ability for borrowers to qualify has been restricted by underwriting guidelines changing, by mortgage insurance companies restricting the types of customers they want to insure, and by decreasing property values in the Treasure Valley, Gillespie said.
A drop in interest rates increases demand and fee income, she said. Interest rate “compression” – a narrowing of the difference between interest earned and interest paid – could be a factor if Idaho Banking Co. held mortgages, but it sells them into the secondary market, she said.
Idaho Bankers Association President and CEO Dawn Justice said the drop in mortgage interest rates creates the opportunity to execute more transactions and to restore confidence.
“People look at it and see a great opportunity, and that’s good overall for the economy,” she said. “It kind of gets the engine moving again.”
The mortgage rate decline is well timed in that an oversupply of homes persists, Justice said.
“Once those start to move – and low interest rates are an opportunity for that to happen – then the next step would be to start to see some new home starts,” she said. “The whole construction and building materials industry would be in position to experience some indirect benefits.”