Mortgage Interest Rates: Lowest Since 1971!

Mortgage rates are at their lowest rate since 1971Interest rates keep breaking records, dropping lower and lower, week after week.

Fear of deflation and a double-dip recession pushed the average interest rate for a 30-year, fixed-rate home loan down to 4.42 percent, with an average origination fee of 0.7 percent. That's the lowest average rate since Freddie Mac began keeping track in 1971, according to Freddie Mac's latest Primary Mortgage Market Survey. This is the ninth week in a row the survey has set a new, historic low.

Impossibly low interest rates seem to have become the new normal -- just like high unemployment. And because of economic forces including new recession fears, federal actions, and the stagnating economy, they're likely to stay very, very low for the next year, according Frank Northaft, chief economist for Freddie Mac.
For more than a year now, Northaft and other economists have been predicting that interest rates will "gradually" rise. The increase keeps getting delayed as rates inch downward. And the "gradual" part of the prediction keeps getting more gradual as the economic recovery weakens.

At the beginning of this year, economists like Northaft figured rates would rise from the high 4 percent range to 6 percent by the end of 2010. Northaft now expects rates to rise "maybe to 5 percent by mid-2011."

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Here's a closer look at some of the forces keeping interest rates low:

No one (on Wall Street) cares about the deficit.

One day, if the U.S. Government keeps on spending more money than it has, investors will stop buying so many U.S. Treasury bonds. The yield on the bonds will rise, along with interest rates for everyone else.

But that day is still a long way off. For now, Treasury bonds seem like a safer place to invest money than practically anywhere else. The yield on 10-year Treasury bonds is at a rock bottom 2.6 percent.

For now, federal policy is to increase inflation.

At some point, in order to prevent high rates of inflation, the Federal Reserve will raise its benchmark interest rates from close to zero, raising interest rates throughout the economy.

But that day is also a long way off. Federal officials now worry more about economy-crushing deflation. To be safe from falling prices, falling wages and even fewer jobs, the Feds aims to keep inflation at a "target" rate of 2 percent a year. That means officials will try to push inflation up from where it is now, which is dangerously close to the tipping point of zero percent. You read that right: The Fed is trying to increase inflation, largely by keeping interest rates low.

No big news

For the last 12 months, compared with the wild chaos of 2008, there's been a depressing sameness to the economic news. Europe wobbled but righted itself. GM is going to be a private company again. Banks are also making money, but we try not to think about the bailouts. Meanwhile, high rates of unemployment and foreclosure continue, month after month with little change.

There's an upside to the depressing sameness of the news -- low interest rates. In the crisis days, mortgage lenders added extra cost to interest rates to compensate for the unpredictability of the time. As the economy stabilizes, lenders are more likely to pass their low cost of capital on to borrowers.

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