Thursday, March 01, 2007

Mortgage rates hit 2-month low

By Holden Lewis • Bankrate.com

Mortgage rates dropped this week in a classic illustration of a phenomenon known as the flight to quality.

The benchmark 30-year fixed-rate mortgage fell 9 basis points, to 6.2 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 6.27 percent; four weeks ago, it was 6.42 percent.
The 15-year fixed-rate mortgage fell 9 basis points, to 5.95 percent. The 5/1 adjustable-rate mortgage fell 12 basis points, to 6.03 percent.

The 30-year fixed hasn't been this low since Dec. 20, when it was 6.2 percent.

The freakish week began with a prediction from Alan Greenspan, former chairman of the Federal Reserve, that a recession could hit the U.S. economy this year. A bomb killed 23 people in Afghanistan, and the visiting vice president was close enough to hear the blast. Then there was a rout in Chinese stock markets, where a prominent index dropped by 9 percent. After that, the Dow Jones industrial average fell 3.3 percent.

That keening you heard Tuesday afternoon from the direction of Manhattan was the sound of Wall Street investors loudly lamenting the jolt in the stock market. A lot of them pulled money out of stocks and used the cash to buy the safest investment they could find: U.S. Treasury bonds.

"You've got a whole 'flight to quality' thing here, where people are exiting stocks and riskier kinds of issues," says Bob Walters, chief economist for Quicken Loans. "People are dumping their money somewhere safe. That's why it's going to Treasuries."

When you buy a Treasury bond or note, you're lending money to Uncle Sam to finance budget deficits. You're guaranteed repayment, because the federal government doesn't default on its debts. It will pay you back, even if it has to print money to do so. When investors take wing and flock to the safety of Treasuries, it's called a flight to quality.

Investors were so eager to buy Uncle Sam's IOUs that the yields on Treasury bonds dropped precipitously. After all, when people are lining up to lend you money, you can get away with paying a low interest rate. Yields on the 10-year Treasury fell 13 basis points Tuesday, to 4.5 percent.

Mortgage rates didn't fall as far. That's because mortgage securities are considered safe investments, but not as safe as Treasury bonds. "Last I knew, the mortgage market doesn't have the authority to print money," is how Walters puts it. "People are looking at home price appreciation dropping. Even though they understand that these bonds are safe, they know that they might not perform as well as they had expected."

The difference, or spread, between the 10-year Treasury yield and Bankrate's average 30-year rate widened to 1.64 percent this week. That's the biggest spread since the week after Thanksgiving.

To search for all available homes for sale in the San Fernando Valley & Santa Clarita Valley, visit: http://www.homes.la

To search the Westside, visit: http://www.homes.la/Westside.htm

No comments:

More Links: