Monday, March 3, 2008

U.S. Mortgage Rates Will Tumble to Four-Decade Low

U.S. Mortgage Rates Will Tumble to Four-Decade Low

By Kathleen M. Howley

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Freddie Mac, the world's second- largest buyer of home loans, said the average U.S. fixed mortgage rate in 2008 probably will tumble more than three-quarters of a percentage point to the lowest in at least 45 years.

The average rate for a 30-year fixed mortgage will fall to 5.5 percent from 6.3 percent last year, the McLean, Virginia-based company said in a forecast today. That would be the lowest annual average in records that go back to 1963.

The low rates won't be enough to spur a recovery in the U.S. real estate market, said Brian Bethune, an economist at Global Insight Inc., based in Lexington, Massachusetts. Bethune forecasts the average fixed rate will be 5.4 percent this year.

``The lower rates, in themselves, are not going to cause a housing turnaround because they are second in importance to excess inventory and falling prices,'' Bethune said. ``People are going to stay away from the market if they see instability, and lenders are going to have a hard time valuing properties and issuing mortgages.''

Economic growth will slow to 2.3 percent this year from 2.5 percent last year, Freddie Mac said in the forecast. Inflation probably will be 2.5 percent, down from 2008's 4 percent, the report said. Freddie Mac would not comment on its forecast, according to spokeswoman Eileen Fitzpatrick.

A slowing economy and low inflation typically signal a reduction in long-term rates, set by investors in mortgage-backed securities, Bethune said.

Home Sales, Prices

Combined sales of new and existing homes probably will drop to 5 million in 2008 from 5.72 million last year, the third consecutive decline, Freddie Mac said. Sales will pick up in 2008, rising to 5.23 million, according to the forecast. Home prices probably will drop 5 percent in 2008 and 3 percent next year, Freddie Mac said, basing its estimate on its Conventional Mortgage Home Price Index that excludes loans above $417,000.

The Federal Reserve has slashed its benchmark rate twice this year in an attempt to avert the first recession since 2001. The January cuts totaling 1.25 percentage points were the largest one- month reductions since August 1982 when the Open Market Committee cut rates by 2 percentage points.

More than two-thirds of Americans own their own home, with total mortgage debt of $11 trillion, data compiled by the Fed show. About two-thirds of those loans are fixed-rate mortgages, according to the Federal Housing Finance Board.

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