Mortgage rates slide again
By Holden Lewis • Bankrate.com

Long-term mortgage rates are at their lowest level of 2002 because Americans work hard and investors are nervous about world turmoil.

The benchmark 30-year fixed-rate mortgage fell 4 basis points to 6.76 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 0.46 discount and origination points.

Just three weeks ago, the average 30-year mortgage rate was 6.91 percent. Rates now are at their lowest since November, when they dipped below 6.6 percent for three weeks as consumer confidence ebbed. Contradictory news dominated newspapers and airwaves in November: Unemployment was rising and consumer confidence was falling, yet consumers went shopping like mad. People were scared about when the next terrorist attack was coming.

Seven months later, unemployment continues to rise, consumers are losing confidence in the economy's future and investors worldwide are frightened that India and Pakistan will wage war. Is there any wonder that mortgage rates are dipping just as they did in November?

Another factor is suppressing mortgage rates: low inflation. Give the credit to American workers, who keep becoming more productive, working harder and smarter. The economy expands even as unemployment rises because workers produce more per hour. This means that businesses can keep a lid on prices because they're getting more work out of their employees, yet paying them the same. In fact, Americans' personal disposable incomes actually declined in April, according to the Commerce Department.

"Productivity numbers are strong and inflation remains very low, so real rates on the 10-year Treasury are probably not that far away from the long-term average of 3 percent," says Michael Cosgrove, an economist and principal of The Econoclast, an economic consulting firm in Dallas.

Mortgage rates are strongly influenced by the yields paid on 10-year Treasury notes. Those yields are hovering around 5 percent, and when you subtract the inflation rate (Cosgrove expects inflation to be less than 2 percent this year), you get a "real" Treasury yield of about 3 percent. Cosgrove doesn't see any of those numbers changing soon, which augurs well for low mortgage rates to persist for a few months.

Another factor that keeps Treasury yields and mortgage rates low is the riskiness of the stock market. When the stock market is depressed, people flock to Treasury notes because they are backed by the federal government and therefore are safe investments. When investors compete to buy Treasury notes, their yields drop -- and so do mortgage rates.

War and rumors of war also spook people out of stocks and into Treasuries. Nuke-rattling in India and Pakistan has an unmeasured but real effect on markets.

Cosgrove adds that he believes foreigners are buying Treasury notes, or at least they're not dumping Treasuries, and that depresses yields and keeps mortgage rates low, too. The consensus on Wall Street is that foreigners are dumping Treasuries, but Cosgrove thinks there might be more rumor than truth to that view. If he's right, it's at least partly a case of people parking their money into the safety of U.S. Treasuries until tempers cool in India and Pakistan.