- The Washington Times - Friday, February 1, 2008

Last week I reported that long-term interest rates finally had dropped to levels low enough to

create a refinancing wave. My phone was ringing off the hook, and I was up to my neck locking in lower rates for dozens of clients.

After I wrote that column, but before it was published, the Federal Reserve Board surprised the world by cutting short-term interest rates by 0.75 percent in response to a global plunge in the stock market.

Although the Fed’s actions don’t always have a predictable reaction on long-term mortgage rates, which are controlled by market forces, those rates dropped further, prompting more inquiries from clients seeking to save some money with a lower rate.

I described the market environment in my last column as being akin to a roller-coaster ride, and the ride continued with the events of the past couple of weeks.

Three days after the Fed’s rate cut and the subsequent drop in mortgage rates, the stock market took a wild one-day ride that resulted in a 600-point swing in one session.

The Dow Jones Industrial Average fell 300 points at the opening. It closed 300 points higher. Investors interpreted the Fed’s move as a real step to prevent a recession and rewarded the market with a buying spree.

This prompted a sell in long-term investments, which included 10-year Treasury bonds and mortgage-backed securities. Higher interest rates were the result.

Still, as of this writing, folks should be able to find a 30-year fixed-rate mortgage near 6 percent requiring low or no fees.

The ride continues. A few days after the Fed’s surprise cut, the National Association of Realtors reported that sales of existing homes had plunged in December by 2.2 percent. This caps off a horrible year in real estate that saw sales drop 13 percent, the biggest decline in 25 years.

The median price dropped by almost 2 percent, the first annual price decline since 1968, when these records were first recorded.

In fact, Lawrence Yun, the NAR’s chief economist, speculated that 2007 was the first year since the Great Depression that real estate prices have had an annual decline.

The way this is playing out, things could have changed once again by the time this column is published. But I’ll stick to my guns.

The problems in the housing market will not go away quickly, and the Fed will take measures, including more short-term interest rate cuts, to prevent a recession.

Whether these cuts will result in a steeper decline in long-term mortgage rates is anyone’s guess.

Predicting mortgage rates is difficult.

With the availability of zero- and low-cost refinancing programs, I encourage homeowners to grab a lower rate when the opportunity arises.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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