It's a cliché to compare mortgage rates to
a roller coaster. So how about comparing rates to the Demon Drop?
That's the ride at northern Ohio's Cedar Point that goes straight
up and then drops into free-fall.
One week after taking their biggest jump in 21 years,
mortgage rates went into free-fall.
The benchmark 30-year fixed-rate mortgage fell 42
basis points to 6.32 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 0.39 discount and origination points. One year ago, the mortgage
index was 6.31 percent; four weeks ago, it was 6.32 percent.
The benchmark 15-year fixed-rate mortgage fell 47 basis points
to 5.93 percent. The benchmark 5/1 adjustable-rate mortgage fell
12 basis points to 6.49 percent.
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Mortgage rates' volatile behavior is part of the credit crisis. There have
been wide swings in various interest rates and bond yields in the
last few months, and mortgages aren't immune.
Three events are combining to push down on mortgage rates this
week. First, governments and central banks in North America and
Europe have been trying to loosen lending among banks, so that banks
then will become more willing to lend to businesses and consumers.
This week, that effort began to show results, as interbank lending
Second, stock prices have been falling. Investors respond by pulling
some money out of the stock market and buying bonds, including mortgage-backed
securities. As a result, bond yields fall -- and mortgage rates
Third, it becomes increasingly clear that the U.S. economy is in
recession, and investors and economists are coming around to the
idea that the recession will be deep and long-lasting. Interest
rates tend to fall in recessions.
Worse, then better
This week, the Mortgage Bankers Association had its annual convention.
Unanimously, bankers and economists believe the real estate and
mortgage industries will get worse before they get better.
"This is, so far, a moderate recession, but it could become
more dramatic," said Ken Rosen, professor of real estate and
urban economics at the University of California at Berkeley. He
says this one is as deep as the downturns in the late '80s and early
'90s and could get deeper than that.
Jay Brinkmann, chief economist for the Mortgage Bankers Association,
says this recession will be the worst in at least 20 years by the
time it's over -- and that's for the overall economy. For the housing
economy, things look worse. In recent history, the pace of housing
starts hit bottom at the end of 1981, when starts dropped to a seasonally
adjusted annual rate of 541,000 units. Brinkmann predicts that this
rate will fall to around 529,000 units in the second quarter next
"We expect that these numbers probably compare with the lows
that we saw in the postwar period of the 1940s, is how much construction
will fall," he said Tuesday.
Meanwhile, foreclosed houses will continue to be added to the inventory
of homes for sale. Rosen believes that, nationwide, house prices
will fall 20 percent, "and we're three-quarters of the way
A few people appeared confident at this year's mortgage bankers'
conference. Property auctioneers had a highly visible presence as
they touted their ability to sell foreclosed properties. And companies
that manage vacant, foreclosed homes seemed to be doing well, too.