The Federal Reserve's attempt to stabilize the housing market set off a chain reaction across the U.S. on Tuesday, dropping interest rates and quickly spurring a burst of refinancing activity by borrowers eager to lower their mortgage costs.
Some brokers said it was the most activity they've seen in at least one year, although there was no way to determine the volume of refinancing.
At Bank of America Corp., call volume was roughly twice what was expected at call centers and via the Internet, said Matt Vernon, national sales executive. "It's the folks who have been sitting on the sideline. They're jumping in with this news."
Rates on 30-year fixed-rate mortgages dropped by roughly half a percentage point to about 5.5%, for borrowers with good credit scores and substantial equity in their homes, say mortgage brokers and lenders.
While the initial flurry of calls came from people seeking to refinance, economists predicted lower rates also will spur some home buying among bargain-seekers. The surge in refinancing will help the overall economy by putting more cash in consumers' pockets and reducing the pressure on some borrowers struggling to make payments.
"This is a win-win," said Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School. "It will directly increase demand for housing and help with the downward spiral in home prices."
The positive response to the Fed action came amid grim news in the housing market. Home prices continued to fall as the economic downturn deepened in September, according data released Tuesday by S&P/Case-Shiller. For the third quarter, the S&P/Case-Shiller home price index posted a 16.6% decline from a year earlier, worse than the 15.1% drop recorded in the second quarter.