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Mortgage Rates Expected to Fall Further


For consumers sitting on the fence about whether to refinance their homes or take out a mortgage on a new one, mortgage experts had two words of advice on Tuesday: Don't rush.

The Federal Reserve's decision to reduce its key short-term interest rate by a half-point, in addition to the likelihood that the Fed will cut rates again this spring, could push long-term mortgage rates lower, many experts agreed.

"It doesn't appear that this economy is going to turn around in a matter of days or weeks," said Randy Merk, chief investment officer of fixed income at American Century Investments. "I still think you have a better-than-even chance of getting even lower mortgage rates somewhere in the next 60 days."

Mortgage rates already are down markedly from a year ago, as interest rates in general have tumbled with the weak economy. The rate for a 30-year fixed mortgage with one point in fees was 6.83% last week in Southern California, down from 8.12% a year ago, said Earl Peattie, head of Mortgage News Co.

Mortgage rates have been hovering around 7% since the start of this year, leaving many consumers to wonder whether they have bottomed out. Economists say a boom in refinancing sparked by last year's dive in rates drove up demand for mortgage money in January, keeping rates from falling further.

Mortgage interest rates don't move in tandem with the Fed's key short-term rate, which is the interest that banks charge each other on overnight loans. So Tuesday's decrease of a half-point does not mean mortgage rates will drop by a similar amount soon.

Instead, mortgage rates tend to follow long-term bond yields. Those yields dropped last year as the economy slowed, and fell further to two-year lows last week as shaky investors pulled money out of stocks and put it in bonds, considered safer investments.

Today, the gap between the 10-year Treasury note yield and long-term mortgage rates is wider than average--a difference of 2.08 percentage points compared with about 1.60 points in January 2000, said John Lonski, economist at Moody's Investors Service.

The 10-year Treasury yield was 4.88% last week, and the rate on a 30-year fixed mortgage with 0.9 point was 6.96%, according to mortgage giant Freddie Mac.

"If the Fed's action convinces investors that the economy will be able to avoid a harsh downturn," Lonski said, "that might enhance the attractiveness of more risky debt instruments like mortgages, relative to risk-free credit assets such as Treasury bonds, and we might get a narrowing of the current wider-than-average gap."

In other words, if the economic outlook brightens, investors will be encouraged to buy mortgage-backed bonds, pumping capital into the market and causing mortgage rates to fall, he said.

But mortgage rates also could be driven lower if Wall Street, already disappointed the Fed didn't make a deeper cut Tuesday, continues to push stocks lower in coming weeks, driving more investors into bonds.

Some economists disagree that mortgage rates will drop again this year, saying the bond market already has priced in expected decreases in rates by the Fed.

"The Fed will cut another 50 basis points [a half-point] in May, which the market has already bid in," said Doug Duncan, chief economist at the Mortgage Bankers Assn. of America. "That will be the end of their cutting," he argued.

Regardless of where rates go now, lower mortgage rates so far this year have helped the housing market act as a cushion for the flagging economy. Mortgage loan applications for the week ended March 9 were up 83.5% compared with the same period in 2000, according to the Mortgage Bankers Assn. Refinancing activity represented about 54% of applications.

Lower mortgage rates also have encouraged consumers who were thinking about buying a home to go ahead and purchase one, said Tom Swanson, Los Angeles-area sales manager for Wells Fargo Home Mortgage.

"Our volume has doubled since this time last year," Swanson said. "There's a huge resale market now, and the opportunity's there. Every time rates continue to drift lower, it opens up the door for purchasing."

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