Mortgage rates keep falling

Seems like every time I write that mortgage rates cannot go lower, they turn right around and make me a liar.
Hey, I'm just playing the odds. Rates on the standard 30-year, fixed-rate mortgage have been at four-decade lows for most of the past year. The smart money says they will go up, not down. Hence, anyone thinking of refinancing or buying a home should hurry.
I've been saying that for months.
Every time I do, the Mortgage Bankers Association comes along to prove me wrong. The MBA says 30-year fixed rates fell in the week ended May 9 to a record low of 5.27 percent, down from 5.53 percent a week earlier.
A year ago, the rate stood at about 7 percent -- and that looked like a great deal. Two years ago, it was 7.3 percent; three years ago, 8.3 percent.
What's going on here?
Silver lining
Mainly, this is the silver lining in the gloomy economy. The Federal Reserve has been working hard to stimulate the economy by making it cheaper for companies and individuals to borrow money to spend.
The Fed does this by cutting interest rates. Usually, this is confined to short-term rates such as the federal funds rate, used for overnight loans between banks. Since early 2001, the Fed has gradually cut this rate from 6.5 percent to 1.25 percent.
Generally, rates on long-term bonds -- the kind that influence mortgage rates -- are set by supply and demand in the market, as investors speculate on whether rates will rise or fall in the future.
But on May 6, the Fed made an unusual move that caused long-term bond rates to fall. After 50 years of inflation-fighting policies, the Fed warned that it is increasingly concerned with the small danger of deflation -- a widespread fall in prices.
Professional bond traders felt that meant the Fed would keep interest rates low for a long time, rather than beginning to raise them sometime this year, as many pros had expected.
Possible Fed action
Since it cannot cut short-term rates much further, the Fed could even turn its attention to long-term rates by buying back U.S. Treasury bonds. That would raise demand, driving bond prices up, which causes rates to fall.
Anticipating that, traders already have been bidding up bond prices, causing the rate on the 10-year Treasury to fall to just over 3.5 percent last week, from around 4 percent a month earlier. A year ago it was above 5 percent. The rate hasn't been this low since the 1950s.
When the 10-year Treasury rate falls, mortgage rates generally follow.
So, here we are: record low mortgage rates that are likely to stick around for months, perhaps longer.
Refinancing
If you're thinking of refinancing or taking out a new mortgage, the big question is whether to wait to see if rates go down even more.
I'm going to take a break from the forecasting business. Certainly, it doesn't look like mortgage rates will rise significantly anytime soon. They could go down more, I suppose. But who knows?
Should you hold off getting a new mortgage to bet rates will fall? Before deciding, take a reality check. Don't get so hung up on percentages -- or fractions of percentages -- that you lose sight of the real numbers.
At 5.27 percent, every $1,000 you borrow on a 30-year loan will cost $5.53 a month in principal and interest payments. Cut the rate to 5 percent and the payment falls to $5.37.
In other words, that 0.27 percentage point reduction would save you $32 a month on a $200,000 mortgage.
Sure, it would be nice to save $32. But if you're refinancing a mortgage you already have, every month of holding out for a lower rate means shouldering the higher cost of the older mortgage.
And, of course, it also means taking on the risk of rates' going up rather than down.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brown@phillynews.com.