Mortgage rates drop for 6th week

Mortgage rates dropped slightly this week, despite the Federal Reserve's hike in short-term rates.

The 15-year fixed-rate mortgage fell 4 basis points to 5.38 percent. The 5/1 adjustable-rate mortgage fell 3 basis points to 5.23 percent.

Mortgage rates have fallen six weeks in a row. In Bankrate.com's March 23 survey, the average 30-year rate was 6.15 percent. It slipped below 6 percent three weeks later and has kept falling.

This week's declines in longer-term mortgage rates happened even as the Fed raised the short-term federal funds rate a quarter point, to 3 percent. The prime rate went up to 6 percent. Rates for short-term debt, such as for variable-rate credit cards and home equity lines of credit, will rise. But most mortgage rates are a different story.

"The Fed and their short-term interest rates and pronouncements mean different things to different mortgage rates," says Jeff Lyons, general manager of RealEstate.com. "A 30-year mortgage rate is certainly going to look at the Fed, but it's looking more at what their thinking is about long-term inflation."

Here's what the Fed said on that subject Tuesday afternoon: "Longer-term inflation expectations remain well contained." The soothing words allowed the longer-term mortgage and Treasury markets to remain in a tranquil state. Yields on mortgage and Treasury debt had not moved much in a week and a half, and they didn't flinch after the Fed's policy action was announced.

Bond traders, whether they're dealing with Treasuries or mortgages or corporate debt, agree with the Fed that long-term inflation is bottled up safely. That's why long-term bond yields are low, and why mortgage rates have remained low. There's little worry about inflation because the Fed has been raising rates since last June in an effort to prevent prices from rising quickly.

In other words, long-term rates have fallen because short-term rates have risen, choking off inflation. In retrospect it makes sense, even though it apparently isn't the result that the Fed intended. Early this year, Fed Chairman Alan Greenspan called it a "conundrum."

Any unexpected inflationary news could send mortgage rates higher. Lyons says it pays to watch for economic reports having to do with employment and manufacturing activity. Strong numbers could translate into higher rates.

Even with the lower rates, and the ever-present threat that they could rise, mortgage applications held steady last week. The number of mortgage applicants was almost unchanged from the week before, according to the Mortgage Bankers Association. ARMs lost a little luster, decreasing to 33.4 percent of mortgage applications from 34.7 percent the week before.