Mortgage rates drop for 3rd straight week
By Holden Lewis • Bankrate.com

The benchmark 30-year fixed-rate mortgage fell 5 basis points to 6.01 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 0.32 discount and origination points. One year ago, the mortgage index was 6.03 percent.

The 15-year fixed-rate mortgage fell 4 basis points to 5.33 percent. The one-year adjustable-rate mortgage fell 2 basis points to 4.07 percent.

Since bottoming out at 5.28 percent on June 11, mortgage rates have trended upward. But now they have dropped almost half a percentage point since peaking at 6.47 percent the first week of September. This three-week fall has happened just as some indicators suggest a rise in interest rates: cautious optimism about the job market, stronger corporate profits, high federal budget deficits, and pressure on Japan and China to strengthen their currencies relative to the dollar.

Ken Mayland, an economist and president of ClearView Economics in Pepper Pike, Ohio, says this sort of rise and fall in rates happens in every economic recovery. "The run-up of interest rates from mid-June to a couple of weeks ago really got overdone," Mayland says.

In a recent newsletter to his clients, Mayland has a chart that shows, he says, that "recession after recession, it's typical that you see this kind of bounce. And then things settle down after the bounce."

"As soon as the mindset moves from how bad things are to how good things might get, bond traders begin to worry, 'Oh, when will inflation start heating up, and when will the Fed start raising interest rates again?'" Mayland says. "On those fears, you often get a very spirited bounce up in those fixed-income interest rates."

Enter the Federal Reserve, which has used its bully pulpit to keep rates down. In its last few meetings, the Fed's rate-setting committee has said that it plans to keep rates low "for a considerable period."

The Fed hasn't defined how long "a considerable period" is, but most people believe it means the Fed won't raise short-term interest rates until well into 2004.

Bond traders took heed, and the yields of U.S. Treasuries have slowly settled downward. Mortgage rates have followed.

But what about those things that boost inflation and interest rates -- prospects of an improving job market, better corporate profits, high deficits? Mayland says those things don't affect rates so much while the unemployment rate is at 6.1 percent and factories are producing 76 percent of their capacity. When there's that much slack in the economy, prices stay down and that keeps the upward pressure off interest rates.