ECONOMY Mortgage rates again plunge to near 40-year low

Record low interest rates have a down side: They signal a weakening economy.
THE WASHINGTON POST
WASHINGTON -- Mortgage rates fell this week to near the four-decade low set in March, further fueling an already record-breaking burst in borrowing and home buying.
The bargain-basement rates are allowing millions of Americans to buy homes, reduce their housing costs or rearrange their debt.
Homeowners who refinanced their mortgages as recently as last year are rushing to do it again. And more people than ever before applied for a mortgage to buy a home last week, according to the Mortgage Bankers Association.
That's why the housing industry remains the brightest spot in an otherwise weakening national economy.
Many analysts believe rates could go down further. But they say it's not necessarily a cause for celebration -- rates are low because of the problems elsewhere in the economy.
"We're in a very tricky situation now," said John Silvia, chief economist at Wachovia Corp., one of the nation's largest lenders. "Rates are going down because the economy is weakening. Low rates have to be taken in context."
Current rate
Thirty-year fixed-rate mortgages averaged 5.62 percent this week, paying 0.8 of a point, down from 5.70 percent last week, according to secondary mortgage market giant Freddie Mac. It was the fourth week in a row that rates have slipped. They're now only a hair above the low of 5.61 percent reached in March.
The latest drop came on the heels of the Federal Reserve's official acknowledgment Monday that sluggish economic growth poses a real threat that prices could fall so much that the economy stalls completely.
The inflation rate has dropped to around 1 percent, sparking fears of deflation, a dangerous condition in which the general level of prices falls, touching off a spiral of shrinking profits and dropping asset values.
After the Fed's acknowledgment, investors rushed to U.S. Treasury bonds and securities, pushing prices up and yields down. The 10-year Treasury bond's yield slipped a quarter of a percentage point during the week, which in turn depressed mortgage rates.
When bond yields drop, mortgage rates sink too, because mortgage-backed securities compete with Treasury bonds for investors.
Doug Duncan, chief economist at the Mortgage Banker's Association, predicted mortgage rates could shrink another quarter of a percentage point. He said, however, that the association hasn't yet revised its forecast that rates will rise gradually during 2003.
Booming housing market
Low mortgage rates have kept the housing market buoyant and have propped up the ailing national economy.
Sales of existing homes around the country have broken records for the past two years and are on target to come in at the second highest level ever in 2003, at about 5.53 million homes sold.
And the boom in refinancing has put money in people's pockets. The Federal Reserve reports that 10 million mortgages were refinanced in 2002, with American homeowners cashing in some $200 billion in equity before pumping much of it back into the economy. Refinancing accounted for more than half of last year's mortgage activity.
If anything, that pace has quickened this year. In the first quarter, refinancings came in at an annualized rate of $3.06 trillion, almost double the $1.65 trillion in 2002.