Turmoil ebbs, mortgage rates remain unchanged

Most mortgage rates dropped for the fourth week in a row as oil prices fell from record highs, and labor compensation grew more than expected.

The benchmark 30-year fixed-rate mortgage was unchanged this week at 5.80 percent, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.38 discount and origination points. One year ago, the mortgage index was 5.85 percent.

The benchmark 15-year fixed-rate mortgage fell 4 basis points to 5.39 percent. A basis point is one-hundredth of 1 percentage point. The benchmark 5/1 adjustable-rate mortgage fell 5 basis points to 5.36 percent.

Judging the Katrina effect
Last week, as the market tried to get a handle on how badly Hurricane Katrina had disrupted oil production and refining in the Gulf of Mexico, the price of a barrel of crude oil briefly rose above $70. Investors consider high fuel prices to be a drag on the economy, keeping overall prices in check, and thus keeping interest rates from rising. And so last week, long-term interest rates, including mortgage rates, went down.

That dynamic seemed to change by the middle of this week, when oil dropped to around $66 a barrel. Oil isn't exactly cheap at that price, but it's less of a brake to the economy than $70-a-barrel oil. The relatively good news for future economic growth sent Treasury yields upward.

Then came Wednesday's news about labor compensation. Unit labor costs -- a measure of wages and benefits that takes productivity into account -- went up 2.5 percent from April through June, and were up 4.2 percent over the second quarter of 2004. As wages and benefits rise, so does inflation. Treasury yields went up, but mortgage rates stayed flat or fell.

Adjustable mortgages less popular
A year ago, almost one-third of mortgage applicants sought adjustable-rate mortgages, or ARMs. Last week, according to the Mortgage Bankers Association, 26.5 percent of mortgage applicants wanted ARMs.

"Compared with one year ago, the volume of ARM applications is down 9.9 percent, whereas the number of fixed-rate mortgage applications is up 22.5 percent," says Michael Cevarr, the MBA's director of member surveys.

That might seem rather odd, since the rate on a 30-year fixed is almost exactly what it was 52 weeks ago. Fixed rates are about the same as a year ago, but ARM rates have gone up. A lot of people figure that they might as well lock in the security of a fixed-rate mortgage if the rate isn't much higher than that of an ARM.
Bankrate didn't track rates on 5/1 ARMs a year ago; but it tracked one-year ARMs, and still does. A year ago the average rate on a one1-year ARM was 4.2 percent. This week it is 4.91 percent. It has gone up 71 basis points; meanwhile, the average rate on a 30-year fixed is 5 basis points lower than a year ago.