Friday, June 23, 2000

Mortgage rates drop despite Fed

By George Hager
USA Today

        Mortgage rates, which spiked in mid-May to about 8.7 percent and looked as if they might be headed to 9 percent or more, have plummeted by about a half point and are now hovering around 8.2 percent.

        That's good news for home buyers, but mixed news for the Federal Reserve Board.

        The sudden drop makes mortgages more affordable, but it suggests just how little control Fed policy makers have over some crucial pieces of the economy. “There's nothing they can do about it,” said Ian Shepherdson of High Frequency Economics.

        Despite the Fed's effort to slow the economy by raising short-term interest rates six times in the last year, longer-term rates for mortgages and corporate borrowing have been falling in the last month.

        “Softening” is the word used by Robert Bollin, president of Winton Savings & Loan Co., to describe the mortgage market in Cincin nati. Interest rates “have been vacillating back and forth. Who knows what Greenspan's going to say next week?” he said, referring to the June 27-28 meeting of the Federal Reserve's policy committee.

        “I've never seen rates up and down like they've done the past year. And it's all because of one man. Whatever he says, rates react,” Mr. Bollin said.

        The tumbling mortgage rates threaten to reignite a cooling housing market that has been one of the signs that the Fed is finally getting the economic slowdown it wants to prevent inflation from breaking out.

        Rates for mortgages and other longer-term borrowing are traditionally set not by what the Fed does but by the

        Treasury securities market.

        Investors in that inflation-shy market interpreted the recent signs of a slowing economy as a signal that the Fed's work has reduced the threat of inflation. That drove up Treasury prices and pushed down yields, which move in the opposite direction. The yield on the 10-year Treasury note — a key benchmark for mortgage rates - is down from more than 6.5 percent in mid-May to 6.1 percent Wednesday.

        That pushed down mortgage costs. Surveys by mortgage giants Freddie Mac and Fannie Mae showed rates for 30-year, fixed-rate mortgages peaking at 8.6 percent to 8.7 percent in mid-May and falling to 8.14 percent for the week ending today.

        The outlook is for more of the same, as long as the economy continues to cool, analysts said.

        As for lower mortgage rates reversing the gradual slowdown in housing sales and construction, probably not, said Neil Bader, chief of IPI Skyscraper Mortgage, a New York mortgage broker. “It's not a big enough change,” he said.

        That and the growing signs that the economy really is slowing help explain why analysts aren't changing their forecast that policy makers will leave interest rates alone when they meet next week.

        Staff writer John Byczkowski contributed to this report.


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