Lowest Interest Rates Ever Recorded, Again

Average interest rates for home loans have never been lower -- at least not since the economists at Freddie Mac first started keeping track in 1971.

The average interest rate for a 30-year home fixed-rate mortgage fell to 4.71 percent, according to the Freddie Mac's Primary Mortgage Market Survey, released December 3.

That's a steep drop from last year at this time, when the average rate was 5.53 percent. And that's a steep drop from 6.03 percent, the average interest rate for all of 2008, which was in turn a steep drop from 2007's rate of 6.34 percent, which was... you get the idea.

It feels like we may never hear the words "interest rates" again without also hearing the words "historic low"... well, unless we're talking about credits cards. So how long can this keep going on?For a while, in the opinion of this housing watcher.

Average mortgage rates tend to float a point or two higher than the yield on 10-year Treasury bonds. Why? Because Treasury bonds represent, to most large investors, the perfectly safe long-term investment. No investor seriously thinks the U.S. government is about to default - if they did they'd be investing in guns and canned food, not bonds. Fixed-rate home loans to strong borrowers are riskier, so the yield demanded by investors and the interest rates for borrowers is that much higher.

Treasury bond yields have been historically low all year, starting under 2.5 percent. If mortgage rates followed their normal pattern, average home loan interest rates would have been in the 3 percent range! But banks were starved for cash and terrified of foreclosures at the beginning of the year, and padded their interest rates.

Banks are now less panicked - even the image-challenged Bank of America is paying back it's TARP money - and mortgage rates have begun to follow Treasury yields once again. The yields have mostly stayed between 3.5 percent and 3 percent this fall, and average mortgage rates have been in the high 4 percent range. Until the next big surprise - a new foreclosure wave, a Fed rate hike - that's probably about where they'll stay.
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