Mortgage Rates in Free-Fall: 4 Things You Need to Know

Freddie Mac said Thursday that rates haven't been this low since 2004.

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Continuing their downward slide, 30-year fixed mortgage rates have hit 4½-year lows, government-controlled mortgage finance giant Freddie Mac said Thursday:

From MarketWatch:

The 30-year fixed-rate average was 5.47% with an average 0.7 point for the week ending Dec. 11, down from 5.53% a week ago. Last year the average was 6.11%.The 30-year average has not been lower since March 25, 2004, when it averaged 5.4%, Freddie Mac said.

Here are four things you should know about this development:

1. What's driving rates lower? A number of factors have combined to push mortgage rates lower. Inflationary pressures have moderated. The jittery stock market and gloomy economic outlook has triggered a flight to quality, which has worked to drive down yields on 10-year treasuries. In addition, the government's recent announcement that it would buy up hundreds of billions of dollars in Fannie and Freddie debt and mortgage-backed securities—and might even start purchasing long-term treasuries directly—has greased the downward slide.

2. Will rates jump back up? Sure, rates may rise from these extremely depressed levels, but they are likely to remain attractive for months, Weiss Research real estate analyst Mike Larson told me recently. "This is a lot less of a situation where you've got a temporary spike lower that if you don't get out the door in 48 hours, these rates are going to be gone," Larson said. "This is more of a longer lasting trend where—sure, you will see some fluctuations—but that the trend in rates is probably lower for a number of months." So if you're looking to buy or refinance, you shouldn't feel like you've got to get your lender on the horn immediately.

3. Where will rates finish the year? Keith Gumbinger of HSH Associates recently told me he expects 30-year fixed mortgage rates to open the New Year at around 5½ percent and drift upwards to end 2009 somewhere between 6 and 6¼ percent. If correct, that means 2009 will be a year of very attractive mortgage rates.

4. Will this be a big boost to the housing market? Not as big as you might think. Lower rates will certainly enable some adjustable-rate borrowers to refinance into more affordable, fixed-rate home loans. But the borrowers who are in the most desperate need of refinancing have negative equity and will therefore be unable to do so. In addition, tighter lending standards will prevent many would-be home purchasers from obtaining the most attractive financing. So while lower rates will indeed help generate housing demand, this development should not be considered a game changer.