Fixed rates on home mortgages are nearing two-and-a-half-year lows, good news for homeowners and the U.S. economy, which needs all the help it can get after coming to a virtual halt in the second quarter.
In the last three weeks, the average interest rate on 30-year mortgages nationwide has been below 7 percent for the first time since March, according to Freddie Mac, the Federal Home Mortgage Corp. And with just a small decline from the 6.92 percent recorded last week, the average could breach the March record of 6.89 percent and become the lowest since early 1999.
On adjustable mortgages, the average one-year rate slipped a bit to 5.67 percent in the week ended Aug. 30. While it remains above the 5.62 percent level of July, it has fallen from 5.77 percent in the first week of August.
The decline in mortgage rates, both fixed and adjustable, is buttressing the resilient housing market and encouraging homeowners to refinance, which can lead to lower monthly payments and can free cash for spending.
"Existing home sales in July were brisk — up more than 7 percent compared with a year ago," said Frank E. Nothaft, deputy chief economist at Freddie Mac. "Low long-term mortgage rates should continue to stimulate that robust level of sales activity, as well as refinancing, in most parts of the country."
The refinancing business has been volatile this year because longer-term Treasury yields began to rise in March after six months of decline. But the overall business has been strong.
The origination index of the Mortgage Bankers Association, which counts applications for new loans and refinancings, jumped 8.3 percent in the week ended Aug. 24. Refinancings accounted for 53.7 percent of the activity, up from 11.7 percent the previous week, and new adjustable-rate mortgage applications accounted for 12.6 percent of the total, up from 11.7 percent.
For the year, the association is forecasting that total mortgage originations will jump to a record of $1.545 trillion. Refinancings are expected to be about $665 billion, just shy of the record of $750 billion in 1998.
Fixed mortgage rates, which peaked at 8.64 percent on 30-year loans in May 2000, fell as the stock market plunged and the economy sputtered. But most of the decline came ahead of the Federal Reserve Board's decision to start cutting short-term rates. Before the Fed's rate cut in January, the average rate on 30-year mortgages nationwide was 7.13 percent.
Despite that cut and six more cuts by the Fed, fixed mortgage rates began to climb in March and were back up to 7.24 percent in June. The fixed rates closely follow the ups and down of the yield on the 10-year Treasury note.
(Adjustable mortgage rates, which respond to shorter-term rates, have been more responsive to the Fed rate cuts. They stood at 7.37 in August 2000 and fell to 6.93 percent before the first rate cut by the Fed. By July they dropped to 5.62 percent; then they rose a bit and inched down again.)
The question now is whether further declines are possible. The yield on the 10-year Treasury note was 4.83 percent on Friday, just above its March low of 4.76 percent. The yield on the two-year note was 3.61 percent, the lowest since the Treasury began issuing these notes in 1972.