Mortgage Rates Dip Lower for Homebuyers

The economy is down but so are interest rates, making loans more affordable and keeping demand high among eager homebuyers.

The economy has slowed to a crawl but the housing market continues to forge ahead, boosted by lower mortgage interest rates for homebuyers. Fears of a cooling economy stimulated another interest rate cut of one-half percent by the Federal Reserve Board. In anticipation of the Fed action, mortgage lenders dropped rates only slightly for home loans. Freddie Mac said the 30-year fixed-rate mortgage averaged 7.09 percent, with an average 1.0 point, for the week ending February 2, 2001, down just a little from 7.15 percent the week before but more than a full point lower than the 8.25 percent average rate a year ago. The average rate could dip again now that the Fed has acted.

If actions speak louder than words, then Fed Chairman Alan Greenspan has the volume control on high. Major commercial banks immediately began reducing their prime lending rate by the same half-point, to 8.5 percent from 9 percent, reducing the cost of borrowing for consumers and small businesses.� Rates charged on many consumer loans, such as home-equity loans and unpaid credit-card balances, and most small-business loans are tied directly to the prime rate. Don't expect to see home purchase loan rates drop by the same amount, however, because they have more to do with fluctuations on 10-year U.S. Treasury notes. Plus rates on 30-year fixed-rate mortgages had already come down sharply in recent months, so another drastic drop probably isn't in the cards. Perhaps a reasonable scenario is that rates will continue to hover affordably at around 7 percent.

The new home market seems to be relatively healthy, although the overall economy is wheezing. In congressional testimony last week, Fed Chairman Greenspan said he believes economic growth is "probably close to zero at the moment." The Department of Commerce doled out sobering news, saying that estimated economic growth dipped to a 1.4 percent annual rate in the fourth quarter, the worst for any quarter since the spring of 1995. On the bright side, Commerce also said that sales of new homes jumped 13.4 percent in December, the biggest monthly gain in more than seven years, which analysts attributed in part to the low mortgage rates. Sales for all of last year reached 898,000, down only slightly from the 1999 record total of 907,000.

Although sales are up, actual construction of new homes slacked off nationally. But the real picture depends on where you live. In Denver, for example, increases in new and existing homes coming on the market could spell relief for inflation-weary homebuyers. Since last year, the average price of a single-family home jumped 17 percent in Denver, to $251,275. But the number of homes for sale is up, too, by 19 percent. More homes on the market should mean more homes to choose from, and hopefully, a leveling-off for prices. It's anyone's guess. Homes frequently sell just as soon as they are listed in Denver, especially reasonably priced ones.�

What direction interest rates take will determine affordability, too. Fixed rate mortgages have dropped but ARMs have not dropped as much compared to a year ago. The one-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 6.54 percent this week, with an average 0.9 point, about the same as this time last year.

Sources used to create this article include Freddie Mac, Kristi Arellano and the Denver Post.