Mortgage rates fall for second straight week

Long-term mortgage rates fell for the second week in a row, and home sales kept going at a record pace. Coincidence? Maybe. Let's talk about timing. But first, this week's rates.

The benchmark 30-year fixed-rate mortgage fell 2 basis points to 5.86 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 0.35 discount and origination points. One year ago, the mortgage index was 5.89 percent.

The 15-year fixed-rate mortgage fell 3 basis points to 5.47 percent. The 5/1 adjustable-rate mortgage fell 9 basis points to 5.47 percent.

Mortgage rates had risen six weeks in a row, from the beginning of July into mid-August. Now they have gone down for two weeks. Here are the differences between then and now: On June 30, the Federal Reserve raised short-term interest rates, and long-term rates responded (finally, the Fed would say) with a sustained rise. The economy seemed strong; investors expected a rise in inflation in the long term, and long-term interest rates rose in response.

Then petroleum prices went up sharply. Consumers responded as investors feared they would, by holding more tightly to their wallets -- except when they were refueling their cars or buying houses. Last week the federal government posted a disappointing report on retail sales in July, and this week the government said that orders for big-ticket, durable goods fell 4.9 percent in July. That was a much bigger drop than expected.

This is where the stats get weird. Even as interest rates were rising in July, homes were resold at the third-highest annual rate ever -- 7.16 million units. New houses were sold in July at an annual rate of 1.41 million units; a record. All this while mortgage rates were rising and people were buying fewer durable goods, such as household appliances.

Now, how could sales of refrigerators and stoves fall while sales of new homes are rising to a record level? It has to do with timing. For its report on new home sales, the federal government counts it "sold" when someone makes a deposit or signs a sales agreement. If you put a deposit on a brand-new house before the builder even digs a hole in the ground, the feds count it as a sale. In fact, 35 percent to 40 percent of new home sales are reported before construction starts. About one-quarter are reported after the construction is completed, and the rest are reported while the house is being built.

Contrast that with the report on existing home sales. The National Association of Realtors counts a home as resold when the sale is closed -- in other words, when you sit at a table and write your signature a few dozen times, not when you make your earnest money deposit.

A lot of people who bought used homes in July had locked their mortgage rates in June, when the average rate on a 30-year fixed remained under 5.75 percent all month. If home resales have much to do with mortgage rates, it's no surprise that July resales were so strong, because rates were low when buyers were locking in June.

People bought houses in the early 1980s when mortgage rates were in the high teens, so if rates rise a bit the rest of the year, home sales are likely to remain strong. "The demand is overwhelming and the supply in our country is not even keeping up with demand," says Jim Gillespie, chief executive of Coldwell Banker Real Estate. "There are more households being created than homes being built."