Mortgage rates drop again
By Holden Lewis • Bankrate.com

The benchmark 30-year fixed-rate mortgage fell 16 basis points to 6.06 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 0.39 discount and origination points. One year ago, the mortgage index was 6.08 percent.

The 15-year fixed-rate mortgage fell 17 basis points to 5.37 percent. The one-year adjustable-rate mortgage fell 7 basis points to 4.09 percent.

In two weeks, the average rate on a 30-year mortgage has dropped 38 basis points. The drop started around the same time that members of the Federal Reserve's rate-setting committee said in speeches that they planned to keep short-term rates low for a while. This week, the Fed made good on those pronouncements, holding short-term rates steady and repeating that rates will stay down "for a considerable period."

The Fed noted what every unemployed person in the land has noticed: that "the labor market has been weakening." Indeed, Americans have about 437,000 fewer jobs now than they held at the beginning of the year.

The dual problems -- disappearing American jobs and the Fed's short-term rate policy -- have encouraged long-term rates to fall. The weak job market implies an economy in which inflation is not a problem. And by holding down short-term interest rates, the Fed pushes some investors to buy longer-term debt, which carries higher rates. When enough people do that, the strong demand drives down bond yields, including those on 10-year Treasuries. Mortgage rates tend to move in the same direction as 10-year Treasuries.

It's impossible to know how long this dip in mortgage rates will last. Demand for homes remains strong. The Mortgage Bankers Association says that the number of applications for home purchases increased last week by 5.8 percent. There was a big drop in the number of people applying to refinance their home loans.

"The increase in the number of mortgage applications to purchase homes continues a trend we have seen since late August and is consistent with the continued drop in interest rates from their recent highs," says MBA economist Jay Brinkmann.

"Recent highs" is a relative term: Rates peaked two weeks ago at 6.47 percent, which is low by historical standards. And this week's average 30-year rate is still a smidgen lower than it was a year ago.

Builders began work on new homes and apartments at a seasonally adjusted rate of 1.82 million residences in August. That's down slightly from a near-record figure in July.