Finally, relief. For the first time in two months, mortgage rates fell.
The benchmark 30-year fixed-rate mortgage fell 8 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 0.27 discount and origination points. One year ago, the mortgage index was 6.83 percent; four weeks ago, it was 6.42 percent.
The 15-year fixed-rate mortgage fell 8 basis points to 6.45 percent. The 5/1 adjustable-rate mortgage fell 9 basis points to 6.58 percent.
Before this week, the average rate on a 30-year fixed had risen seven weeks in a row, going from 6.27 percent in Bankrate’s April 25 survey all the way up to 6.84 percent in last week’s survey. It had been more than three years since rates had climbed so rapidly.
Weekly national mortgage survey
Results of Bankrate.com’s June 20, 2007, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
|30-year fixed||15-year fixed||5-year ARM|
|This week’s rate:||6.76%||6.45%||6.58%|
|Change from last week:||-0.08||-0.08||-0.09|
|Change from last week:||-$8.80||-$7.25||-$9.82|
Reasons for mortgage rate drop
This week’s drop-off followed reports on consumer inflation and housing activity that were interpreted as noninflationary by investors. Like tea leaves or animal entrails, these economic reports could have been interpreted in many ways. They could have been seen as harbingers of rising inflation and a rebounding housing sector. But that’s not how bond investors saw them, and the result was falling bond yields and mortgage rates.
On Friday, the Labor Department reported in the consumer price index that overall prices went up 0.7 percent in May. That was the second biggest monthly increase in 16 years and a sign of out-of-control inflation.
But bond traders, the Federal Reserve and the financial press follow the “core CPI,” an inflation measurement that disregards prices of food and fuel, which tend to have big ups and downs month to month. Gasoline prices skyrocketed in May, so when you ignore them, you end up with a core inflation rate in May of 0.1 percent. The bond market paid attention to that tame inflation reading and, as a result, the yields fell on inflation-sensitive bond yields and mortgage rates.
Housing starts’ influence
Then, on Tuesday, the Commerce Department reported that housing starts fell in May and that building permits were up compared to the previous month. The rise in permits was attributed solely to an increase in permits for multifamily structures, such as apartment buildings.
The bond and mortgage markets, mindful that the residential construction sector is in a recession, ignored the rise in building permits, which might be a mere anomaly. Instead, investors focused on the decline in housing starts. That signal of a slowing economy sent bond yields and mortgage rates even lower.
“The U.S. Treasury market had reacted to inflationary pressures around the world” when rates were rising, says Jeff Lazerson, president of Mortgage Grader, which he describes as a “consumer advocate electronic brokerage.”
“But on a more local level,” Lazerson says, “there’s information that’s come out since then to indicate that housing is deeply depressed, and that’s driven rates down. Markets tend to jump and react to the latest news.”
The Mortgage Bankers Association reported that loan applications fell 3 percent last week compared to the previous week, but they were up 13 percent compared to the same week a year earlier, when rates were almost identical.