Mortgage rates are down, but can they fall further?

    From today’s Tennessean…

    Mortgage rates have been on the decline, but speculation is rife that rates are headed still lower. I spoke Friday with Scott Ractliffe, president of the Tennessee Mortgage Bankers Association, about whether now is the right time to refinance or consider a home loan.

    Where are rates now?
    The 30-year fixed rate is in the low 5s, probably in the 5.25 range. … Two weeks ago, it was 6 to 61/8.

    What’s bringing them down?
    The primary cause was when (the federal government) decided to buy mortgage-backed securities directly. The more buyers there are for mortgage-backed securities, that drives prices up and inversely drives the yield down.

    Anytime a lot of people are buying mortgage-backed securities and bonds, mortgage rates go down. … If they’re not buying stocks and they’re going to invest in something, and if investment dollars are flowing towards bonds, then they’re also flowing towards mortgages.

    We’ve been hearing a lot about rates perhaps dropping to 4.5 percent. Why?
    One reason would be partly political. In order for the overall economy to start to rebound, home prices have got to stabilize, foreclosures have to get under control in terms of numbers, and a very low mortgage rate would help with both of those things.

    There’s a lot of talk on Capitol Hill of what can they do. There’s really no target level … but they all realize — we all realize — that rates in the mid-4s would create a lot of activity. There are no specifics of what that might look like. It could be only for purchase money. It could be only certain income brackets. Which is why I warn people, if they’re thinking about refinancing, not necessarily to wait.

    Another reason is if you’re looking at mortgages historically, rates average a 1½ percent spread over Treasury yields. … Today it’s about 2½, so you should have a rate of 4½. Mortgage rates are still artificially high on that basis.

    That would be a reason to wait, wouldn’t it?
    That’s true, but that spread has been 2 to 2½ percent for months. I guess the question is when will those spreads come back to normal, and when they come back to normal, whether yields will go up or rates will come down. It’s kind of a gamble either way.

    What’s your prediction?
    It looks like we do have a little farther to fall, but I guess how far is anybody’s guess. So much of it depends on the economy overall. As long as the economy, like retail sales, corporate profits and so forth, are staying really, really low, we’re looking at the possibility of mortgage rates continuing to drop.

    Once we see some signs of strengthening, money will start to be pulled out of the safe havens they’re in now. … They (rates) could rise quickly when they come back up.

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