Rates drop, and so do home sales

Home sales are crashing and investors are losing billions of dollars on bad home loans. In all, it spells great news for mortgage rates.

The benchmark 30-year fixed-rate mortgage fell 18 basis points to 6.31 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 0.34 discount and origination points. One year ago, the mortgage index was 6.46 percent; four weeks ago, it was 6.49 percent.

The benchmark 15-year fixed-rate mortgage fell 17 basis points to 6 percent. The benchmark 5/1 adjustable-rate mortgage fell 14 basis points to 5.12 percent. The 30-year fixed jumbo fell 20 basis points, to 7.04 percent -- the lowest it's been since late July.

This week's rate decline was steep, but it's not the record low for the year. In the middle of September, the benchmark rate on the 30-year fixed fell to 6.28 percent, and in March it slipped to 6.16 percent.

Why rates declined

Mortgage rates had been scooting downward for a week, and then came Wednesday morning's double-barreled blast from Merrill Lynch and the National Association of Realtors.

Merrill Lynch announced that it would write down almost $8 billion in mortgage and mortgage-related assets. Less than three weeks before, Merrill Lynch had said it expected to write down $4.5 billion in mortgage-related assets.

That's quite a big change in just three weeks, and it startled investors. Stock prices fell abruptly, before recovering late in the day.

Then the Realtors released the existing-home sales report for September. Home resales last month fell 23 percent compared with the same month last year -- from 529,000 units sold in September 2006 to 409,000 units resold this September. On a seasonally adjusted basis, sales fell 19 percent. The inventory of unsold, used homes on the market reached 4.4 million units. At that sales pace, it would take 101/2 months to sell all the houses now on the market.

Jumbo problems

Half of the homes sold in September cost more than $211,700 -- a 4.2 percent decrease from the median price of $220,900 in September 2006. With supply at 101/2 months and rising, prices are destined to keep falling.

If you're a renter and you want to buy a house someday, that's promising news. But Wall Street doesn't view the situation optimistically, and that's why mortgage rates fell this week. "Bad news in some areas of the financial markets is good news for conforming mortgage rates," sums up Bob Moulton, president of Manhasset, N.Y.-based Americana Mortgage. "I think the worst is yet to come. I think this problem is bigger than we imagine."

The outlook was sunnier at the headquarters of the National Association of Realtors, where senior economist Lawrence Yun blamed the decline in home resales to problems with jumbo mortgages. A jumbo is a home loan for more than the conforming limit, which is $417,000 this year. Lenders have had difficulty selling closed jumbo loans, and that has made jumbo mortgages harder to get.

"Because there were fewer transactions at the upper end of the market, there is a downward distortion reflected in a lower national median home price," Yun says. He says the logjam in jumbo loans has eased.