Mortgage rates down again
By Holden Lewis • Bankrate.com

Mortgage rates have fallen for the second week in a row.

The benchmark 30-year fixed-rate mortgage fell 9 basis points to 5.75 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.37 discount and origination points. One year ago, the mortgage index was 6.82 percent.

In Bankrate.com's weekly survey, the 30-year rate has remained relatively steady for the last month and a half, varying in that time from this week's 5.75 percent to a high of 5.95 percent. Rates usually vary more than that in a six-week period.

Rates haven't moved much because there is so much conflicting information about the economy. Consumer confidence is rising and housing sales are strong, but people continue to lose jobs at the rate of more than 400,000 a week and businesses continue to be reluctant to spend on buildings and equipment.

The Federal Reserve's rate-setting committee meets next week, and the panel is expected to keep short-term rates steady. Commodities traders at the Chicago Board of Trade have priced in just a 14-percent probability that the Fed will cut the overnight rate from 1.25 percent to 1 percent.

Some mortgage shoppers probably are waiting until the Fed meeting before locking a rate, on the assumption that mortgage rates will fall if the Fed cuts short-term rates. But that's not necessarily how things work.

When you rent a hotel room overnight, you expect to pay a different price than if it were a similar-sized apartment you rented by the month. Similarly, interest rates vary by the length of the loan.

"When the Fed changes rates, they change the federal funds rate, and that's the rate at which large member banks borrow from one another for a very short period of time," says Bob Walters, vice president of secondary marketing for Quicken Loans. That's why the federal funds rate also is known as the overnight rate.

The Federal Reserve manipulates the overnight rate. The market sets long-term mortgage rates.

"It's very possible for the Fed to drop the federal funds rate and for mortgage rates to rise," Walters says. "Why? Because the market determines mortgage rates. Their focus is 10 years from now, not tomorrow."

Mortgage rates remain low because it looks as though inflation will be tame for a long time. In fact, Fed chairman Alan Greenspan told a House committee on Wednesday that inflation is about as low as he wants it to go.

With inflation so low, "further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending," Greenspan said.

The Fed has cut short-term rates 12 times since the beginning of 2001. When you look at what happened with mortgage rates one month after each Fed rate cut, there is no clear-cut trend. Seven times, mortgage rates dropped in the month after a Fed rate cut. Four times, mortgage rates went up. One time there was no change.