Posted on: Friday, February 20, 2004

30-year fixed mortgage rate drops to 5.58%

By Joe Richter
Bloomberg News Service

The average 30-year fixed mortgage rate fell to 5.58 percent this week, the lowest in seven months, amid signs of continued low inflation, Freddie Mac said. Other rates also declined.

The rate for this week was the lowest since 5.52 percent on July 11, and compares with 5.66 percent last week, according to the No. 2 purchaser of U.S. mortgages. A year ago, the average 30-year rate was 5.84 percent.

Prices excluding food and energy rose in 2003 by the least in 43 years, and Federal Reserve Chairman Alan Greenspan last week said policy makers can remain "patient" before raising interest rates because of tame inflation. Mortgage rates close to the lowest ever spurred record housing sales last year.

"There continues to be no sign of inflation on the horizon and, as a matter of fact, core inflation is at a generational low," said Frank Nothaft, Freddie Mac chief economist.

The average 15-year fixed mortgage rate declined to 4.87 percent from 4.96 percent. The one-year adjustable mortgage rate slipped to 3.53 percent from 3.57 percent, said Freddie Mac, which is based in McLean, Virginia.

Consumers have taken advantage of the low rates to purchase homes and refinance mortgages. Combined sales of new and existing houses rose to a record 7.19 million in 2003, beating the previous all-time high of 6.54 million in 2002.

The Mortgage Bankers Association's index of U.S. mortgage applications rose last week for the first time in the past four. The measure of home purchase applications rose 2.9 percent to 413.9 from 402.2 and is close to a record reached in January.

Joel Rassman, executive vice president and chief financial officer of Huntingdon Valley, Penn.-based Toll Brothers, the largest U.S. builder of luxury homes, said even an increase in borrowing costs may not slow demand.

"If interest rates go up because of a strong economy, we think the improvement in the economy and jobs will far outweigh the effects of whatever small to moderate rise in interest rates there may be," Rassman said in an interview yesterday.

Federal policy makers have said they expect inflation to remain muted even as the Fed's benchmark lending rate stands at 1 percent, the lowest in almost 46 years.

"The effect of slack resources remains predominant at this time, and we expect inflation to remain low this year, somewhere in the range of 1 to 1.25 percent," Chicago Federal Reserve Bank President Michael Moskow said today in the text of remarks to the Commercial Club of Chicago. "With inflation low, the Fed can be patient in removing its policy accommodation."