Mortgages hit 2011 low--could rates go lower?

It was hard to miss events on Wall Street last week, but the attention given to the Dow and its 500-point fall on Thursday mask an equally important story: Mortgage rates hit an eight-month low and are within striking distance of the lowest rates since World War II.

Normally low rates are a cause for cheer but a caution is needed in this particular case. Here's what's happening and why:

As the Dow was burying itself into a trench, Freddie Mac issued its weekly rates report. It told us that 30-year fixed-rate mortgages (FRMs) averaged 4.39 percent, down from 4.55 percent the week before. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.18 percent. That product was down from 3.25 percent a week earlier.

These mortgage quotes are unusual for three reasons:

First, the drop with fixed-rate loans--16 basis points in a week--shows an unusual amount of movement in the marketplace.

Second, the mortgage quote itself--4.39 percent for fixed-rate financing--is stunningly low.

Third, we're not that far from the all-time record low, the November 11, 2010 report which told us that fixed-rate mortgages could be had for 4.11 percent.

You could look at these rates and realize that they are literally the way to prevent millions of foreclosures. Just refinance everyone with today's mortgage rates and we would instantly end the toxic loan crisis, lower monthly costs and create more discretionary dollars for households to spend, something that would greatly help the economy.

But, unfortunately, the good news with mortgage loan rates may not offer much practical help. People still need to qualify to refinance, and that requires income.


We have large numbers of people unemployed. The Bureau of Labor Statistics reported last week that unemployment was down to 9.1 percent and 117,000 happy people found new work; unfortunately, a 9.1 percent unemployment rate remains high by historic standards. Also, we don't know what the new workers are doing. They may now have jobs, but what kind of jobs do they have? Minimum wage? Marginal work?

If you're an investor watching home prices and jobs you have to wonder where to put your money. In a risky world lower home values in the U.S. and bad unemployment numbers do not suggest much confidence in the stock market--thus the 500-plus decline on Thursday.

The catch is that while things look bad to us in the U.S., they look even worse in many other places. Unlike Syria and Libya, we don't have government tanks and sharpshooters in the streets. Our currency is stronger than the cash in Iceland, Greece, Spain, Portugal and maybe Italy. Unlike steelworkers in China, no one in the U.S. works 16 hours a day, seven days a week--for 75 cents an hour.

The result is that those with cash are taking their money and looking for a nice secure place to keep their dollars. Stock represents a lot of risk today so arguably one of the best places at the moment to keep cash is in the form of paper from the U.S. government. Another good place is bonds, with their regular interest payments.

As it happens, as more money flows into bonds mortgage rates go down. And that's how last Thursday the stock market crashed and mortgage rates tumbled.

The original article can be found at hit 2011 low--could rates go lower?