Mortgage rates fall on slowing inflation

By Joe Richter
Bloomberg News Service

The average rate on a benchmark 30-year fixed mortgage in the United States fell to a five-month low of 5.75 percent this week, amid reports showing subdued inflation, according to Freddie Mac.

The 30-year rate fell from 5.83 percent last week and is the lowest since 5.52 percent in the week ended April 2. The one-year adjustable rate rose to 4.03 percent from 4 percent, said McLean, Va.-based Freddie Mac, the No. 2 purchaser of U.S. mortgages. The 15-year fixed rate declined to 5.13 percent from 5.22 percent.

Prices paid to factories, farmers and other producers in August unexpectedly fell, a government report showed last week, and the Labor Department said today that August consumer prices excluding food and energy rose less than expected, suggesting the Federal Reserve won't accelerate the pace of interest-rate rises.

The data "showed that the run-up in oil prices has not been inflationary at the consumer level, much to the relief of mortgage lenders," said Frank Nothaft, Freddie Mac's chief economist.

The Fed is forecast to raise the benchmark overnight bank lending rate by a quarter-point on Tuesday to 1.75 percent, the third increase since June, based on a Bloomberg economists survey.

Low mortgage rates have spurred home buying. Sales of new and existing homes will reach a record 7.65 million this year, and prices probably will rise 8.6 percent, matching last year's gain, as the 30-year fixed mortgage rate averages 5.9 percent, Freddie Mac said last week. Fannie Mae is the largest home loan purchaser.

Meritage Homes Corp., the 13th-largest U.S. homebuilder by stock market value, said profit next year will exceed analysts' estimates after the value of its order backlog surged 45 percent. Meritage is based in Scottsdale, Ariz.

"We're living in a period of low inflation, a very overall benign inflation environment, and that's healthy," U.S. Treasury Secretary John Snow told reporters in Cincinnati yesterday. "It means that interest rates stay at lower levels and that mortgage rates stay at lower levels."