Mortgage rates drop a quarter percent
By Holden Lewis • Bankrate.com

The day the government announced that 93,000 jobs exited the U.S. economy in August, long-term interest rates dived. They dropped a quarter of a percentage point in a week.

The benchmark 30-year fixed-rate mortgage fell 25 basis points to 6.22 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 0.31 discount and origination points. One year ago, the mortgage index was 6.25 percent.

The benchmark 15-year fixed-rate mortgage fell 27 basis points to 5.54 percent. The benchmark one-year adjustable-rate mortgage fell 8 basis points to 4.16 percent.

Homeowners wasted no time in reacting to the lower rates. The week saw a 45 percent jump in refinancing applications, according to the Mortgage Bankers Association. "With mortgage rates decreasing for the first time in over two months, consumers are taking advantage of a dip in interest rates," says Doug Duncan, the MBA's chief economist.

Duncan calls it "possibly the final opportunity to capture a temporary rate drop in a rising rate environment."

That sounds about right. Rates have been rising, interrupted by two short dips, since the end of June. Even last week's jobs reports are unlikely to change the long-term, upward trend in rates, economists believe.

The government reported that 413,000 people filed unemployment claims the last week of August. Then it reported that non-farm payrolls decreased by 93,000 in August. To put it another way, people held 129,854,000 jobs in July and 129,761,000 jobs in August.

Even as the U.S. economy purged 93,000 jobs, the unemployment rate dropped in August to 6.1 percent from 6.2 percent in July. That's bad news because it's a sign that thousands of people stopped looking for work. Most of them presumably got discouraged and gave up. Others started their own businesses or enrolled in school.

The employment numbers were unexpected. The yield on the 10-year Treasury dropped one-quarter of a point in two days. Long-term mortgage rates quickly followed.

Richard DeKaser, chief economist for National City Corp., says it's simplistic to pin the drop on long-term rates entirely on the jobs reports. He says the lousy employment data "threw a little cold water on building expectations."

Investors don't feel pessimistic, but they feel less optimistic, DeKaser says. At the same time, inflation is tame. That brings up another factor that contributed to the drop in rates: a series of speeches by Federal Reserve officials late last week. They sang from the same hymnal: that they're not inclined to raise short-term rates anytime soon.

DeKaser points especially to a speech last week by Ben Bernanke, a member of the Fed's rate-setting committee, who said he believes that inflation will drop even lower next year. He predicts that worker productivity will continue to increase, which "may enable producers to meet expanding demand without substantially increased hiring in the near term, with the result that labor markets remain soft."

Even when the economy begins to pick up, the Fed might be slow to raise short-term rates, Bernanke added. That statement added to investors' conviction that interest rates will remain low, and contributed to the decline in mortgage rates.