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The Honolulu Advertiser
Posted on: Saturday, September 30, 2006

Interest rates favoring the tardy

By Vinnee Tong
Associated Press

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NEW YORK Procrastination has turned out to be a pretty good tactic for Michael Hulet, a prospective homebuyer shopping near Sacramento, Calif.

Hulet, who's relocating from Portland, Ore., missed a self-imposed Sept. 1 deadline to move but is glad he did, after watching mortgage rates fall since he started looking in June.

"I was able to hold off a little longer until the rates came down," Hulet said.

A rally in the Treasury market has sent bond interest rates tumbling to seven-month lows, bringing mortgage rates down, as well and giving the languishing housing sector a blip up. The improvement in the housing market is expected to be temporary, however; an end to the rally would send mortgage rates rising again. And, even if rates stay low, that alone won't turn the market around.

Growing evidence that the economy is slowing is behind the decline in interest rates, which move in the opposite direction from bond prices. Yesterday, the Commerce Department supplied the latest data, reporting that consumer spending fell 0.1 percent in August, the largest drop in nearly a year. That could indicate even slower economic growth in the current quarter, after the annual growth rate in the last quarter registered just 2.6 percent.

Market watchers had expected bond yields to stay above 5 percent through the end of the year, yet this past week they dipped to 4.55 percent on Monday, an unexpected low.

"That implied a fair amount of pessimism about the economy and optimism about inflation," Wells Capital Management senior portfolio manager Jay Mueller said. "There's only so long you can go in that direction."

Meanwhile, 30-year fixed mortgage rates, tied to the yields on 10-year Treasury bonds, are at six-month lows.

The average for 30-year fixed-rate mortgages fell this past week to 6.31 percent, down from 6.4 percent the previous week and the lowest rate since it was 6.24 percent in early March, Freddie Mac, the mortgage company, said Thursday. Other mortgage rates also fell this past week, with 15-year fixed-rate mortgages at 5.98 percent, down from 6.06 percent the previous week.

Lower rates, though, "are not going to quickly help housing," said Diane Dercher, a senior vice president and chief economist at the investment firm Waddell & Reed. Dercher said the market was hurt more by the rapid price appreciation and excess building that now "needs to be worked through."

"Rates will help, but they are not the key factor," she said.

Weakness in the housing market is likely to be a major consideration if the Federal Reserve decides to start cutting rates again. A Fed rate cut would lead to lower borrowing costs on consumer credit, home equity and other types of loans.

Many economists believe the Fed, which halted its more than two-year string of rate hikes in August, will begin lowering rates early next year.

"The market is reflecting the growing belief that the Fed will cut rates in the not-too-distant future, as early as the first half or first quarter of next year," Mueller said. "At the moment, it's not priced in to happen earlier than that."