Mortgage Rates Drop Below 5 Percent: 4 Things to Know

Lower interest rates are the silver lining of this housing market.


With all the doom and gloom in the housing market, you might have missed this nugget of good cheer: 30 year, fixed mortgage rates have fallen below 5 percent—to 4.96 percent—for the first time ever, according to Freddie Mac. Lower rates have already triggered a wave of refinancing applications and could work to spark some much-needed demand in the housing market. Here's five things you need to know about the trend:

1. Uncle Sam is behind the dive: Fixed mortgage rates have been falling in recent months for a number of reasons, such as lower inflation and investors' flight to quality, which has helped drive down yields on 10-year treasuries. (Fixed mortgage rates typically track the yields on 10-year T-bills.) More important, the Fed has recently undertaken an initiative to purchase hundreds of billions of dollars in Fannie Mae and Freddie Mac debt and mortgage-backed securities. The Fed also has suggested that it may begin buying long-term treasuries directly. Both moves have been big factors in the decline.

[Check out Mortgage Rates in 2009: 7 Things You Need to Know.]

2. The long-term outlook remains favorable: Although rates could certainly increase from these record-breaking levels, they should remain attractive for the rest of the year. Thirty-year fixed mortgage rates will "wax and wane" in the 5½-to-6 percent range before closing out the year somewhere between 6 and 6¼ percent, Keith Gumbinger of HSH Associates, told me recently. "That's still very attractive," he said. "There is no reason to think that rates are going to go up so substantially so as to erode the marketplace."

3. There's a muted impact on home buying: Although lower rates will convince some buyers that it's time to get into the market, the overall impact on housing sales will be marginal, says Richard Moody, the chief economist at Mission Residential. "Mortgage rates are low right now, and they are not doing much good in terms of stimulating sales because of the conditions of the labor market and the broader economy," Moody says. Tighter credit and weak consumer confidence also are working to limit demand. "There are just so many negative factors out there in terms of buying a home right now," he says.

4. The Refinancing Wave: But the falling interest rates have already triggered a wave of refinancing applications. The Mortgage Bankers Association reported earlier this week that its refinancing index climbed 26 percent from the previous week to its highest level since 2003. However, many of these applications will be turned down in the face of higher lending standards and falling home prices. "Only about a third of outstanding U.S. mortgage debt is likely to qualify for refinancing," Doug Duncan, chief economist of Fannie Mae, said in the Wall Street Journal. "Nearly 70 percent of borrowers don't make the cut . . . most often because their credit isn't good enough or they don't have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being 'under water.' "