Mortgage rates moved deeper into uncharted territory this week, as fear of a double-dip recession prompted investors to flee to the relative safety of long-term bonds and other conservative investments, including mortgage-backed securities that fund most mortgage lending.
Rates on 30-year fixed-rate mortgages averaged 4.36 percent with an average 0.7 point for the week ending Aug. 26, down from 4.42 percent last week and 5.14 percent a year ago. That’s a low in records dating back to 1971, Freddie Mac said in releasing the results of its weekly Primary Mortgage Market Survey on Thursday.
"Existing-home sales plunged 27 percent in July, while new homes fell 12 percent to a new all-time record low, which led to some market concerns that the housing market may slow the economic recovery," said Amy Crews Cutts, Freddie Mac’s deputy chief economist, in a statement.
"As a result, long-term bond yields fell to the lowest levels since January 2009, allowing fixed mortgage rates to ease to new record lows this week."
Rates for 15-year fixed-rate mortgages also hit a new low this week in records dating to 1991, averaging 3.86 percent with an average 0.6 point. That’s down from 3.9 percent last week and 4.58 percent a year ago.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) remained unchanged from last week, averaging 3.56 percent with an average 0.6 point. That’s down from 4.67 percent a year ago, and represents a low in records dating to 2005.
Freddie Mac said 1-year Treasury-indexed ARMs averaged 3.52 percent with an average 0.7 point, down from 3.53 percent last week and 4.69 percent a year ago.
Bond prices and yields move in opposite directions. When demand for Treasurys and other long-term investments including mortgage-backed securities (MBS) heats up, the cost of acquiring them goes up and their yields fall.
Although there were some fears that mortgage rates would rise when the Federal Reserve wrapped up $1.25 trillion in purchases of MBS in March, demand by investors has remained strong.
In March, the Mortgage Bankers Association projected that rates on 30-year fixed-rate mortgages would rise to 5.8 percent during the final quarter of 2010, and average 6.2 percent in 2011 and 6.4 percent in 2012.
The MBA’s most recent mortgage finance forecast, issued on Aug. 17, projects that 30-year fixed-rate loans will rise to an average of 4.8 percent during the fourth quarter of this year, and stay around 5 percent most of next year.
MBA economists don’t foresee mortgage rates ticking up at a more rapid pace until 2012, when they expect 30-year fixed-rate mortgages to climb to an average of 5.8 percent during the final three months of the year.
In commentary accompanying their latest forecast, MBA economists said the most likely scenario for the future is "a continued pattern of tepid growth and modest improvements in the unemployment rate, with a similarly slow recovery in the housing market."
But "the odds of a worse outcome, including a return to recession, are still high, and this fear will keep both short- and longer-term rates lower than we had previously forecast," MBA economists said.
While record low rates have spurred another wave of refinancings, demand for purchase loans remains weak. As of last week, demand for purchase loans was down nearly 39 percent from a year ago, the MBA said.
The MBA is currently forecasting that purchase mortgage originations will total $606 billion this year, down nearly 18 percent from 2009. The MBA’s mortgage finance forecast projects purchase mortgage originations will grow by nearly 15 percent in 2011, to $696 billion, and hit $904 billion in 2012.