Mortgage Rates Respond to a Double Dose of Good News
30-year mortgage rates fell sharply over the past week, extending a sustained move into more affordable territory. Two key factors were behind the change:
- The high-profile government bail-out of Freddie Mac and Fannie Mae increased lender confidence
- Interest rates in general have been falling, responding to easing inflation worries
Is this reason to be optimistic about the housing market? As always, optimism about housing should be tempered with a healthy dose of caution, but this does spell opportunity for certain buyers and home owners who want to refinance — especially those with strong credit histories.
30-year Mortgage Rates Sharply Lower
30-year mortgage rates slipped below 6.0% for the first time since May, and to their lowest level since mid-April. According to Freddie Mac’s weekly survey, the 30-year mortgage rate stood at 5.93% as of September 11, 2008. This is down sharply from the recent peak of 6.63% reached in July, and represents a decline of 0.42% in just one week.
What’s going on here? Well, interest rates consist of essentially two components: a credit risk premium, and an inflation premium. Both have had reason to move downward recently.
Takeover of Fannie Mae and Freddie Mac Boosts Lender Confidence
The biggest reason for the decline of the credit risk premium in mortgage rates was the government announcement that it would be taking over Fannie Mae and Freddie Mac. These organizations exist to give lenders confidence by backing a large number of mortgages, so when it emerged that they were on shaky financial ground, it made lenders nervous that their safety net would no longer be there. When lenders get nervous, they demand higher interest rates for their loans.
Therefore, when the U.S. government and its deep pockets came to the rescue, it gave lenders renewed faith in that safety net. There may be a little euphoria in the extent of the drop in interest rates, since conceptually the Federal Government was obligated to back those loans all along, but a decisive action can go a long way in a jittery market.
Interest Rates Respond to Lower Oil
Mortgage lender confidence wasn’t the only explanation for lower interest rates last week, since Treasury rates also fell. In fact, the 10-year Treasury note has seen a sustained drop in yield (effectively, its interest rate) over the past three months, recently reaching 3.60% after peaking at over 4.25% in June.
Changes in Treasury yields are generally a reflection of shifting inflation concerns. With oil now descending towards the $100-a-barrel range, those concerns have eased considerably.
What now?
The drop in mortgage rates is good news for new home buyers, and such a steep drop should be enough to make refinancing attractive to some existing mortgage holders. 6% is something of a magic number for mortgage rates – below that and rates are often low enough to stimulate activity, but they also are pretty rare on a historical basis. The visit earlier this year by mortgage rates to the realm below 6% proved to be fleeting, so buyers and refinancers would do well not to delay getting into the market.
Tags: 2008, fannie mae, freddie mac, housing market, interest rates, lenders, mortgage, mortgage rates
