To much fanfare, the Federal Reserve cut interest rates on October 29th. That was supposed to be this week’s Halloween treat for the markets. The trick came the next day, when Freddie Mac’s survey of mortgage rates revealed that 30-year rates had risen sharply for the week. 

So what gives? A clue to why market rates moved contrary to the federal funds rate could be found in two other pieces of news:

• The housing market continued to be weak, as one survey of major housing markets saw prices extent their slide to 25 consecutive months
• The U.S. dollar showed signs of weakness which were exacerbated by the cut in federal funds rates.

For the time being then, despite the Fed’s actions, things got tougher for borrowers rather than easier. This highlights some realities of what the Fed can and cannot do.

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As expected, mortgage rates continued their manic behavior, heading downward this week as focus shifted to the likelihood of recession: 

• A parade of bad earnings reports by U.S. companies created a growing impression that a recession may have already begun.
• The effect of economic weakness and falling oil prices was evidenced even more in the bond market than in mortgage rates, as 10-year Treasury yields fell nearly half a percent in just over a week.
• While the economic malaise had clearly spread throughout the economy, the source of the trouble — the housing market — continued to struggle. Foreclosures rose yet again in the third quarter of 2008, and new home construction slowed to the weakest level since 1991.

Certainly, this is the most troubling economic environment in a generation — but one with at least some glimmer of hope.

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As national and global economic plans were unveiled, the stock market careened between seven-hundred point losses and nine-hundred point gains, then back to huge losses again. Overall, the losses far outweighed the gains, despite a general impression that world governments were taking all the right steps to address the credit crisis.

Meanwhile, each of the two major-party Presidential candidates came out with mortgage plans of their own, but these didn’t create a ripple in the markets.

Why then? Because the financial markets are starting to focus on the real problem. Meanwhile though, some potential home buyers who understand that problem and how it affects them may find the that the mortgage and housing markets are presenting a compelling opportunity. 

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It should have been hailed as good news. Instead, the move by 30 year mortgage rates back below 6% was largely overshadowed by other events:

• In quick succession, the government launched a huge mortgage bailout package and a half-point cut in interest rates, and considered direct intervention in banks.
• None of the above calmed financial markets, as stock market declines actually accelerated upon passage of the mortgage relief bill.
• Even the price of oil came under such pressure that OPEC called an emergency meeting.

So what is a mortgage shopper to do? Take advantage of lower rates, or stay on the sidelines until the world financial turmoil subsides?

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Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.

This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.

The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?

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As congress debated the Wall Street bailout, there seemed to be an underlying assumption that some kind of package was necessary to put liquidity back into the mortgage lending industry. The general impression is that tougher lending standards have made mortgages scarce, and indeed, the number of existing home sales continued to slip in August. Taken at face value, these stories might be enough to scare potential home buyers out of the market, at least long enough for the bailout package to kick in. However, before heading to the sidelines, those potential home buyers would do well to ask two key questions:

• Are new mortgages really that scarce?
• Will things be better or worse once government rescue efforts take hold?

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There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

• Insurance giant AIG became the latest addition to the string of financial failures, the taxpayer cost of which is rapidly rising
• Leading economic indicators declined by more than expected in August
• Along with a slowing economy, inflation also backed off rapidly in August
• Lower inflation gave interest rates room to fall, so mortgage rates took another impressive step downward over the past week

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

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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.

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It was enough to make any mortgage observer recall the old joke about the light at the end of the tunnel turning out to be a train. A steady drip of positive news lately was overshadowed by the news that lender GMAC Financial Services was closing 200 retail offices and laying off 5,000 employees. The move was designed to scale back the firm’s mortgage lending presence in reaction to losses in that sector.

Still, while this story grabbed the headlines, home buyers and mortgage shoppers should not lose sight of some of the more positive news:

• Mortgage rates have settled into a gentle, downward trend
• Lower oil prices are taking some of the heat off of inflation, and thus interest rates
• Mortgage application volume showed signs of life

While the GMAC story was a reminder of why economic recoveries can take so long to develop, the underlying fundamentals suggest that conditions may be getting better for the housing market.

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An unexpectedly strong revision of second quarter gross domestic product (GDP) stood out amid an otherwise mixed bag of economic news of interest to home and mortgage shoppers.

In fact, this strong GDP number should be something of a wake-up call, or a call-to-action, for anyone who has been putting off buying a house. It may not pay to delay any further before starting to look for a house and compare mortgage companies.

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