Current mortgage rates decline to lowest level since summer of 2005

Mortgage rates have dropped to their lowest levels since the summer of 2005, as more people become convinced that the economy is in a housing-led slowdown.

The benchmark 30-year fixed-rate mortgage fell 13 basis points, to 5.75 percent, according to the national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 6.26 percent; four weeks ago, it was 6.21 percent.

The benchmark 15-year fixed-rate mortgage fell 17 basis points, to 5.28 percent. The benchmark 5/1 adjustable-rate mortgage fell 14 basis points, to 5.67 percent. As usual, the 30-year jumbo, for mortgages exceeding the $417,000 conforming limit, fell less rapidly — down 5 basis points, to 6.98 percent.

The benchmark 30-year rate hasn’t been lower than this since July 6, 2005, when it was 5.7 percent. Less than six months ago — July 25, 2007 — the benchmark 30-year rate was exactly 1 percentage point higher, at 6.75 percent. It has dropped fairly steadily since then, but the decline accelerated at the beginning of this year. The 30-year fixed has fallen 56 basis points in three weeks, the biggest three-week drop since February 1988.

Bad news on many fronts

Rates have plunged this month as news kept coming in that the economy is going stale:

The unemployment rate for December jumped to 5 percent from the previous month’s 4.7 percent.

A panel of economists convened by The Wall Street Journal put the chance of a recession at 42 percent, up from 38 percent in December.

Ben Bernanke, chairman of the Federal Reserve, said in a speech that “the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets.” He strongly hinted that the Fed will cut short-term rates again.

The Fed’s Beige Book, a summary of economic activity in the central bank’s 12 regions, said economic activity increased modestly in the last six weeks of 2007, but at a slower pace than the six weeks before that. “Residential real estate conditions continued to be quite weak in all districts,” the report said.

Economists for the PMI Group, a mortgage insurance company, noted that home values have fallen an average of about 4.5 percent nationwide in the last year. “Are we nearing the end of the current housing downturn?” PMI economists David Berson and LaVaughn Henry wrote. “We don’t think so, given the magnitude of the run-up in housing (with no significant housing downturn since the recession of 1991-92).”

Depreciation by metro area

PMI Group ranks the 50 biggest metropolitan areas by the likelihood that house prices will be lower two years from now. In 12 of those areas, the odds are 65 percent or greater. Southern California’s Riverside-San Bernardino metro area leads, with a 94 percent chance of lower prices two years from now. Following that are Las Vegas (89 percent chance) and Phoenix (83 percent). The rest of the depreciating dozen are in California and Florida.

North Texas fared best of the 50 biggest metro areas, with less than a 1 percent chance of a price drop in the Dallas-Plano-Irving area and in Fort Worth-Arlington. The rest of Texas is expected to escape falling house prices, too.

“There are two things that are distinguishing what’s going on in Texas,” Berson says. “First, they didn’t have the surge in prices in the first five years of this decade that other places had, in part because they didn’t have the surge of investor demand. The prices didn’t get out of line with fundamentals there. Also, the Texas economy is doing fairly well.”

In contrast, housing bubbles, inflated partly by investors, filled and burst in Southern California, South Florida, Las Vegas and Phoenix.

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