Mortgage Rates Continue to Drop

Conforming mortgage rates dropped below 5% for the first time in three weeks, according to a survey released by Freddie Mac. 5% is considered by many experts to be a key psychological level, below which activity in the home buying market often increases. Interest rates on U.S. 30-year fixed-rate mortgages averaged 4.98 percent for the week ending November 5, down from the previous week’s 5.03 percent. Thirty year mortgage rates averaged 6.2% just one year ago.

Lower interest rates could help stabilize prices, as it often fuels demand for homes. Pleasanton, Dublin and San Ramon have all seen some price stabilization in certain neighborhoods recently, and lower interest rates could help continue that trend.

“Lower mortgage rates should help homeowners lower their monthly payments and feed the ongoing recovery in the housing market,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.”

While still higher than the record low 4.72% set in April, this week’s decline is considered important because the general consensus is that rates will rise in 2010 as the economy continues to recover. The Federal Open Market Committee recently decided to keep short term rates low due to weakness in the economy, low inflationary pressures and high unemployment. However, as the economy improves, these dynamics will change and interest rates are expected to increase.

In addition, the Fed’s Mortgage Backed Security purchase program, begun in 2008 will be discontinued by the end of the first quarter of 2010. This is potentially a driver of higher interest rates, as Mortgage Backed Securities will now have to attract other investors besides the Federal Reserve, and higher rates are the mechanism (they tried packaging these securities in edgy, state of the art high gloss covers, but that did not seem to do much to attract more investors). This from the Federal Reserve Bank of New York:

“On September 23, 2009, the FOMC announced that the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and gradually slow the pace of these purchases, anticipating they will be executed by the end of the first quarter of 2010.”

So keep an eye on interest rates as we head towards the New Year. It is possible, if not probable, that we will look back at these rates and kick ourselves for not taking advantage of them. And looming inflation will definitely pose a threat to long term interest rates as the economy recovers.

Courtesy of Reuters