When all is said and done, borrower psychology—and not mortgage rates—could face the bulk of any housing-market damage that stems from the Standard & Poor’s rating downgrades.
S&P downgraded the credit ratings of Fannie Mae and Freddie Mac
on Monday morning to AA+ from AAA. That, of course, followed Friday’s
rating cut for the United States.
The downgrades by themselves don’t appear to have done much to roil mortgage markets. (Today’s WSJ story previewed
some of the risks). The 10-year Treasury note, to which mortgage rates
are closely tied, has fallen to a record low, which is good for mortgage
rates. That could be offset, in part, if mortgage investors demand
slightly higher prices for mortgages.
And it’s important to remember that investors’ demand for higher
prices on mortgages could have less to do with the downgrades themselves
and more to do with the way lenders are managing an uptick in refinance
activity that began in earnest last week when rates fell sharply.
At this point, it seems the downgrades are likely doing far more
damage to consumer psychology than to mortgage rates, which have fallen
to around 4.37% for a 30-year fixed rate loan, near historic lows.
The rout in the stock market, new worries about layoffs, and the
euro-zone crisis will not help consumer confidence. “Who wants to get
out of bed today, let alone buy a house?” says Lou Barnes, a mortgage
banker in Boulder, Colo. For consumers who are ready to take the plunge,
qualifying for a mortgage, not the mortgage rate itself, continues to
be the main hurdle limiting would-be buyers.
Here’s what some industry watchers say:
Lawrence Yun, chief economist, National Association of Realtors:
“Even if [mortgage] rates were to rise because of the downgrade, this
fact is less important in light of the current overly stringent
underwriting standards and the general lack of consumer confidence about
the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not
change the housing game that much, but a return to normal underwriting
standards and a boost to consumer confidence will be the true game
changer.”
Dan Oppenheim, analyst, Credit Suisse: “We fear that
the macro and equity market turmoil will roil the already-fragile
consumer confidence, cutting into housing demand and home prices
(presenting risk to our volume and book value estimates for
homebuilders). We noted in our July Survey of Real Estate Agents the
tension between favorable affordability and buyers’ anxiety. We think
the see-saw has likely tilted dramatically toward anxiety winning out. …
Affordability has remained near its all-time most attractive levels for
some time (we estimate the monthly mortgage payment on a median-priced
home represents just 14% of median gross household income, compared to
20% historically), but buyers are unlikely to move forward with plans
while lacking confidence.”
Stan Humphries, chief economist, Zillow:
“The real near-term impact of the downgrade on the housing market won’t
happen via mortgage rates but rather through reduced consumer
confidence. Consumer confidence is being buffeted right now with
negative signals, from reports early last week of declining consumer
spending in June to more tepid job growth numbers reported on Friday. In
periods of economic turmoil, many consumers tend to hunker down, making
it less likely they will engage in high-priced transactions like home
purchases. Moreover, the stock market declines that have accompanied the
debt ceiling debate and the credit rating downgrades by S&P won’t
help consumer confidence either, making any consumers invested in the
markets feel that much poorer.” 
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