Interest Rates: How much lower can they go?

Mortgage rates inched down again to new record lows. The following are excerpts from the newsletter on interest rates published by HSH Associates :

"Persistently low mortgage rates are helping the housing market to come back to life, but it would be unreasonable to expect that the upward journey would have no setbacks. Given fears of "shadow inventory" of millions of properties looming over the market, is is a strange happenstance that a lack of inventory may be throttling home sales in some areas, while also serving to lift home prices. It is just the latest twist in the saga of mortgage and housing markets. 

That good news about the housing market was tempered to some degree by the latest report for existing home sales. In June, a disappointing drop of 5.4% was noted by the National Association of Realtors, with sales slipping to an annualized 4.37 million rate for the month. A piece of analysis in Friday's Wall Street Journal suggests that a lack of inventory is at least partly to blame for the slower sales pace; however, available inventory nudged point-two of a month higher and stands now at 6.6 months of homes for sale at the present pace. In reality, this is little different than figures seen since last December.

For our part, we suspect that the slower pace of sales is more likely due to a deceleration in the economy which intensified in the second quarter.

Perhaps it's not the number of homes for sale, but simply that there are fewer bargain-priced homes available. A fair bit of inventory is in various stages of foreclosure/short-sale/REO limbo at the moment, and it may well be that those cheap homes are only trickling onto the market. That might explain the continued increase in home prices, which have now increased over year-ago values for four consecutive months. If the market is comprised solely of relatively "higher priced" homes for sale, the median price would tend to continue to climb, at least for the moment. It should be noted that lower mortgage rates also provide support for rising home prices, as the monthly cost of a carrying a larger loan is offset by a smaller interest rate against which it is applied.

Will the Fed do more to support economic growth? It was hard to discern this from Fed Chairman Bernanke's testimony before Congress this week. The Chairman expressed concern and displeasure about the present state of the economy, as did several members of both the House and Senate, but there came no clear sense that any new Fed move was imminent. At this point, with the economy sputtering but still running on the positive side of the ledger, the Fed probably prefers not to start any massive new programs unless some new catastrophe emerges, or a existing one intensifies.

In the context of a slowing (or at least slower) economy, mortgage rates continue their drift downward. From a peak in late March, rates have shed about a half-percentage point, much to the benefit of refinancers and homebuyers. However, the decline in rates has clearly come as the result of an economy which lost momentum from the Eurozone crisis and investors seeking a return of their capital rather than a return on it. At the moment, the economy needs more risk-taking, more speculation to obtain hoped-for future gains, more hiring and more opportunities to move forward. Instead, money continues to run and hide from risk, and the recovery and expansion continues to the threatened by it.

A lesser calendar of economic news is due next week, including our first look at second quarter GDP. It doesn't seem like there will be much to move mortgage markets to any great degree, and the couple-of-basis-point weekly decline we've become accustomed to will probably remain for next week. "

The following are interest rate quotes from Al Hermann of American California Financial :