Mortgage rates plunge along with home prices
By Holden Lewis • Bankrate.com

In a week where it became clear that the housing boom has busted, mortgage rates fell, too.

The benchmark 30-year fixed-rate mortgage fell 15 basis points to 6.29 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 0.31 discount and origination points. One year ago, the mortgage index was 5.97 percent; four weeks ago, it was 6.49 percent.

The 15-year fixed-rate mortgage fell 16 basis points to 5.96 percent. The 5/1 adjustable-rate mortgage fell 12 basis points to 6.07 percent.

News heralding slower economic growth dominated the week. The government announced that durable goods orders fell 0.5 percent in August, for the second month in a row. Investors had been expecting an increase in August.

Weekly national mortgage survey

Results of Bankrate.com's Sept. 27, 2006, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Home sales down, too
Then there were the reports on used-home resales and new home sales in August. Prices and sales volume were down compared to August 2005, and more than 4 million houses are on the market. Housing is a large sector of the economy, and for years consumer spending has been lifted by huge increases in house values. The prospect of a softening in consumer spending drove bond yields and mortgage rates downward.

One economist, Dean Baker of the Center for Economic and Policy Research, describes it this way in his blog: "People have been borrowing against their homes at a rate of more than $700 billion a year. This borrowing has helped to sustain consumption in the wake of slow job growth and declining real wages."

Baker's thinking goes like this: If home values continue to fall, some homeowners won't have any more equity to borrow against. They won't buy as much. That would cause the rest of the economy to slow down.

This line of reasoning is not unanimous. Mike Moran, chief economist for Daiwa Securities America, says, "I really don't think much of consumer spending is driven directly by mortgage equity withdrawal." People buy stuff when they feel confident, whether or not there is home equity to finance the spending, he says.

'We're going through a correction'
Nevertheless, the bond market, which helps set mortgage rates, didn't react warmly to news that the median resale price of used houses fell 1.7 percent in the 12 months ending in August. Half of the houses resold in August cost more than $225,000; the median price a year before had been $229,000.

New houses had a similar decline. Half of brand-new houses cost $237,000 in August, down from $240,100 the previous August.

Moran says: "We're going through a correction in the housing market, but it's a badly needed correction. It's healthy and unavoidable." It's orderly, not disorderly, and it's not a catastrophe, he adds, saying, "All we've done is squeezed out the exuberance of 2004 and 2005."

David Seiders, chief economist for the National Association of Home Builders, agrees. "We're now in the midst of an inevitable and necessary adjustment," he says, calling it a positive outcome, because "we need a period of below-trend performance to work off excessive inventory and to rebuild affordability."

Judging by what has happened to mortgage rates in the past year, the rebuilding effort on affordability has a long way to go. If your neighbor bought a median-priced house in August 2005, borrowing 80 percent at the average rate, the monthly principal and interest would have cost $1,084. If you bought a house under comparable circumstances this year, the principal and interest would total $1,142.

That's because prices went down just a little, but the average rate on a 30-year fixed went from 5.88 percent in August 2005 to 6.54 percent in August this year.