Big Mortgage Market Rally

Big Drop in Mortgage Rates

I don’t know what button the Fed or Treasury pushed today — I’ve been mercifully out of the news loop* all day, doing what realtors do — but clearly something happened to drive mortgage rates dramatically lower.

Rates fell from around 6% yesterday to 5 5/8% at the end of today. That may seem like a trivial drop, but it’s the mortgage market equivalent of a 500 point gain in the Dow Jones.

Given all the complicated proposals to aid the housing market, what’s been overlooked is that the single biggest — and simplest — way to spur demand for housing is to make it cheaper.

In turn, there are really only two ways to do that: 1) Sellers drop their prices; or 2) financing becomes cheaper (the vast majority of residential housing is purchased with borrowed money). There is actually a third way — consumers make more money — but that’s off the table during a recession.

After all the cash pumped into banks this Fall, it’s about time for a little of it to actually reach the housing market in the form of lower rates.

*Here’s the missing link explaining the rate drop:

“The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent.” — The New York Times (11/26/08).