People respond to changing incentives, and there is a lot of that going on these days. Mortgage rates have dropped to all-time record lows, and refinancing activity, not surprisingly, has exploded. New applications for mortgages are starting to pick up as well, but so far most of the activity is centered around refinancing. For all of those homeowners who have enough equity in their home to qualify for refinancing, which I assume must be the majority, refinancing now can result in locking in historically low mortgage rates and reducing monthly payments by a meaningful amount. Even those with negative equity in their homes might consider using some of their cash or liquidating other assets in order to reduce their loan amount and thus refinance.
My nephew who deals with foreclosed properties in the Inland Empire (about 40 miles west of Los Angeles) tells me that buying interest is strong and prices appear to have stabilized in the past month or so. And it makes sense, since mortgage rates are exceptionally low and prices in many of the previous high-flying areas have dropped 50%. Homes are now reasonable again. Buyers can even finance the purchase of a property and then rent it out for a positive cash flow.
It's taken about three years, but the market seems to have found a new equilibrium. To be sure, there are lots of foreclosed properties yet to hit the market, and many more in the pipeline, but there does not appear to be any shortage of buyers, and financing costs are extremely attractive. I find all of this news extremely encouraging.
Look back at the chart. The last time we had such a massive refinancing boom as is now underway was in the first half of 2003. As you might recall, that was a time when economic gloom was pervasive. The Fed was "pushing on a string;" interest rates had collapsed because demand had collapsed; it was a "jobless recovery" that threatened to morphy into a global deflation/recession. The entire world was thus astonished when the U.S. economy surged ahead in the second half of 2003. Bush's tax cuts undoubtedly had a lot to do with the recovery, but who's to say that Obama won't cut any taxes early next year? This is no time to despair.