Mortgage Rates Down? Greece, Portugal Might Explain Why

Interest rates dropped again last week as economists argued about the financial crisis in Europe and how bad it might get. As HousingWatch reported, Greece and Portugal's bad news could be the American homebuyers' gain.

But how does such faraway news directly affect the U.S.?

Average interest rates for 30-year, fixed-rate home loans flew to 4.78 percent for the week ending May 27, according to the Freddie Mac Primary Mortgage Market Survey.

Since December, writers like me have said over and over again that interest rates would rise. But here we are half-a-year later and interest rates are barely higher than the record 4.71 percent interest rate recorded last December - the lowest average interest rate recorded by Freddie Mac since it started keeping track in 1971.

What's going on?
Remember early 2009, when half your friends said the massive federal government bailout of the U.S. financial system wouldn't work and that banks like Citigroup and JPMorgan Chase would collapse anyway, taking our $700 billion with them?

Well that's where Europe is right now. The financial crisis that started in Greece and threatened to spread to Spain and Portugal (and then Italy, Ireland and everywhere else) has been quieted by a trillion-euro bailout from the stronger nations of the European Community.

But economists and pundits are split. The loudest proclaim Europe's bailout won't work, while the optimists sit more or less quietly with their fingers crossed. It will be months before we know who is right.

Meantime, investors around the world have taken their money out of short-term investments like the stock market, because, well, frankly they just don't know what's going to happen in the short term. The Dow Jones Industrial Average has dropped a thousand points -- from over 11,000 in late April, when the Greek financial crisis began to make headlines -- to a little above 10,000 in the beginning of June.

Long-term investments, such as bonds issued by stable governments, have done better. Despite our own budget deficit, the U.S. looks more stable than many other countries. Since late April, the price investors pay for 10-year U.S. Treasury bonds has spiked, driving the yield on the bonds from 3.9 percent in late April down below 3.2 percent in the beginning of June.

Bonds backed by home loans have done the same. Most of those bonds are guaranteed by Fannie Mae or Freddie Mac, which are both supported by the federal government. So the price of the bonds has gone up, while the yield to investors has gone down. Banks use money from the sale of those bonds to make more home mortgages, so the lower yield for bond investors, has turned into lower interest rates for borrowers.

Analysts are split about what will happen next to mortgage rates. Roughly half of the economists and experts polled by think rates will stay the same for at least another week. Roughly a third think rates will inch up. About one-in-six think rates will creep down, according to's Mortgage Rate Trend Index.

However, interest rates will rise eventually.

"Mortgage interest rates are once again at their all-time low levels, and now is an incredible time to take advantage of them, as we will likely never see rates at this level again in our lifetime," said David Kuiper, mortgage planner for First Place Bank.

Whatever you decide, keep one thing in mind: Local economies are now more global than ever -- get used to it.

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