Mortgage Rate Outlook

Disappointing economic news pressed underlying interest rates down to their lowest levels of 2006, and mortgage rates will follow them, according to the nation's deepest poll of mortgage rates and terms. The average 30-year fixed rate mortgage (FRM) shed three basis points (.03%) to close the week's survey at 6.27%, and seems likely to fall below the 2006 low of 6.23% set on January 20 next week. Hybrid five-one ARMs lost four basis points, closing the week at an average at 6.08%.

Although most indicators remain in pretty fair territory, it seems fairly clear that the slowdown in the second and third quarters of this year is persisting into the fourth quarter, and perhaps intensifying somewhat. As home sales have tanked, economic slowness does seem to be spreading to a greater degree.

Sales of less-costly existing homes managed to move higher for October, with annualized sales rising to 6.24 million for the month. Despite the rise, sales remain well below peaks, and inventory levels of homes for sale remain quite high at 7.4 months. Prices for new homes have been slipping, and the National Association of Realtors noted that on a year-ago basis, prices have fallen for three consecutive months.

Sharply rising prices created an affordability crisis where home price increases far outstripped increases in incomes. That ever-widening gap was filled by employing the euphemistically named "affordability mortgages," primarily option-style ARMs or those loans with interest-only payments or very long repayment terms, or some combination. The combined effects of higher short-term interest rates, discussions of the risks of non- or negatively amortizing loans, tighter regulations for the riskiest products, and steadying home prices have made these choices less desirable, and unsurprisingly, borrowers have stepped away. In turn, that dearth of demand puts downward pressure on prices, as the most motivated sellers (including speculators) become more 'motivated' to sell. Whether or not this situation will continue into a housing rout is unknown, but easing prices and stable-to-falling mortgage rates should provide at least some support for home sales as we turn into 2007.