Declining Home Prices, Rising Mortgage Rates

by: Barry Ritholtz

The Fed's effort to bail out the credit crisis and Housing crash has run into an odd problem: Despite cutting rates 225 basis points since September, mortgage rates have actually gone up:

"The Fed's efforts so far to soften the blow of the housing slump with lower interest rates appear to be having a muted effect. Since September, the Fed has reduced its target for short-term interest rates by 2.25 percentage points to 3%. But some mortgage rates are actually rising, and those that are falling haven't fallen that much.

The average interest rate on a standard 30-year fixed-rate mortgage was 6.38% yesterday, little changed from September but up from 5.61% in late January, according to HSH Associates, a mortgage-data publisher in Pompton Plains, N.J. Interest rates on so-called jumbo mortgages -- those larger than $417,000 -- were at 7.35%, also close to their September levels.

Rates on adjustable mortgages have come down, but not by as much as the Fed has cut the rates it influences. A three-year ARM, for instance, carried a 5.43% interest rate yesterday, down from 6.29% in mid-September. Still, lower short-term rates should help millions of homeowners who took out ARMs with low teaser rates that are set to jump higher.

There are two reasons mortgage rates haven't responded more to the Fed's rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."

courtesy of WSJ

We closed on our current home March 2007. 30 year, prime, conforming mortgage. Rate: 6.125%. And, we keep getting refi offers from Chase and Citibank -- for 6.25 - 6.50%. (No thanks!)

Well, the Fed may not have impacted the mortgage arena much, but at least (as forewarned), they have had a significant impact on prices: rampant inflation...

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Decline in Home Prices Accelerates
Fed's Efforts Have Only Muted Effect On Mortgage Rates
WSJ, February 27, 2008; Page A1