Mortgage rates nudge up after drop

Mortgage rates climbed a bit this week as economists strived to make happy noises about the dismal housing market.

The benchmark 30-year fixed-rate mortgage rose 4 basis points, to 6.78 percent, according to the Bankrate.com 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 0.29 discount and origination points. One year ago, the mortgage index was 6.87 percent; four weeks ago, it was 6.84 percent.

The benchmark 15-year fixed-rate mortgage rose 5 basis points, to 6.46 percent. The benchmark 5/1 adjustable-rate mortgage rose 6 basis points, to 6.54 percent.

It was a strange week, rates wise, as treasury yields spiked and crashed, while mortgage rates weren't as volatile. That's not, by itself, unusual: Treasury yields and long-term mortgage rates tend to move in the same direction, but not always at the same speed. But there was more of a disconnect than usual this week, and it partly had to do with subprime mortgages.

On Tuesday, the companies that rate mortgage-backed securities aimed a double-barrel blast at subprime home loans. Standard & Poor's lowered its ratings on more than 600 securities backed by subprime mortgages, and announced that it would change its rating criteria. S&P will begin casting a more jaundiced eye on subprime mortgages, and that almost surely means that more subprime mortgage-backed securities will be downgraded.

Also on Tuesday, Moody's Investor Service, another rating agency, downgraded almost 400 securities backed by subprime mortgages.

Treasuries affected

Treasury yields had risen 10 or 15 basis points earlier, but they fell dramatically on the news of the subprime downgrades. The 10-year treasury yielded 5.16 percent Monday and it closed at 5.03 percent Tuesday, after S&P and Moody's made their announcements. The sharp decline in treasury yields exemplified what's called the "flight to quality." Treasury notes are ultra-safe investments, and that's where the money goes when investors feel nervous. When so much money flows quickly into the treasury market, yields fall as treasury prices rise.

The reaction was more muted in the market for prime mortgage-backed securities. On Tuesday, yields fell on prime mortgage securities, but not as much. That's an indication that investors believe prime mortgages are much safer than subprime home loans.

State of the housing market

In this nervous market, the National Association of Realtors announced that it expects house prices to continue falling for the next nine months or so, and then jump in the second quarter of next year.

Nationally, year-over-year prices for previously owned houses have been falling for a year now. According to the Realtors, the median price for a used house fell 2.1 percent in May compared with the previous May, to $223,700.

But it's not as bad as all that, says Charles Plosser, president of the Federal Reserve Bank of Philadelphia. "In my view, the widely reported headline numbers overstate the decline in home prices," he told a gathering of economists in London.

Plosser says house prices have dropped in the same places where they zoomed upward earlier in the decade. "There are many areas of the country where house prices have not declined, but have merely slowed in their rate of appreciation," he said. "I think this fact is sometimes lost in the news headlines."