Mortgage interest rates are falling again after rising to hit almost 6% last week. Rates for mortgage loans are now in a range between 5.375% and 5.75%. Currently market pressures show this downward trend continuing in the short term. Money is moving out of the stock market, and foreign countries such as Russia have not only stopped saying unflattering things about the US dollar, but have actually been affirming its importance as the world reserve currency. This helps strengthen the dollar and results in money also flowing out of commodities, with some of it going into bonds.

The Fed has the balancing act to maintain between working to promote full employment and working to keep inflation low. The financial publications, such as CNBC, report that the Fed may extend their purchases of U.S. Treasuries when they meet next week. This will help to stimulate the economy with added liquidity, but due to investors inflation concerns an overly aggressive expansion of buying is not likely.

The steep rise in U.S. government bond yields resulted in the latest spike in mortgage rates. Rising interest rates while still in the depths of a severe recession would slow down or stall economic recovery efforts. Fortunately other measures of credit market unease, like the spread between U.S. government debt and recent corporate debt issues, have eased. This helps the Fed a lot with its delicate balancing act. They do not have to feel compelled to risk furthering inflation fears buy buying U.S. Treasuries too aggressively.

Given current and historical trends, it is likely that we saw an historic low in mortgage interest rates last month, when they were as low as 4.5% to 4.625%. Since I do not have a crystal ball, and no one can pick market tops or bottoms with absolute accuracy, I’d advise those looking to purchase or refinance a home to lock into any rate near 5%. If we see anything around 5.125% to 5.375% I’d say lock and load!

Some of these long term trends are easy to see. The forces at work are powerful and inevitable. At some point those buying our bonds will worry that the value of their investment will decrease due to either a drop in the value of the dollar, or to inflation, or simply to reduced demand. Since the value of the dollar is relative to other currencies, and most of the other major currencies are not doing so well because their economies are also struggling, that would not account for the increase in rates. Inflation is not yet a problem, so that would not cause rates to rise either. However, there are many people who anticipate inflation will increase, and some think it will be sooner rather than later and are moving money into commodities like Gold and Oil. Some of that money must be moving out of bonds. Also, the stock market has been doing well as of late, with money moving into stocks as well.

The Fed has also slowed the rate at which it has been buying up Treasuries, further reducing demand. The Fed cannot continue to buy up Treasuries forever, since to overdo it would stoke up inflation. Remember, when the Government buys bonds from itself, it does so through what is alternately called monetization or quantitative easing. Laymen would call it printing money.

You just do not know exactly when these things will play out. Mortgage Rates have been slowing trending up, but they really spiked up in the last two days. Even before this event, mortgage applications dropped 8.6% last week according to the Mortgage Broker’s Association survey released Wednesday. I don’t understand why. Not only were rates as low as most adults have ever seen, a trending up would lead many homeowners to say “hey, I better lock into these good rates while I can.” I have been emphasizing the fact that rates have been at historic lows not seen in the 38 years that Freddie Mac has been tracking mortgage rates.

I have been surprised at how many people have not understood the significance of this enough to act on it, especially with the expanded loan approval guidelines recently instituted by the Obama Administration allowing for creditworthy homeowners to borrow up to 105% of their home values to refinance down to lower rates. Is this something that is too abstract for someone outside of the industry, or someone who does not have a “head for numbers,” to grasp based on that statement alone? I have even worked the numbers for some people, showing them how they would save $200 to $300 per month, EVERY MONTH, by refinancing at these incredible rates. I’m talking about middle class people, so that’s a significant, recurring savings. In some cases it seemed like I was just talking to myself.

I do have to give one of my customers credit. This guy also happens to be a friend, and a former statistical engineer. He asked me to work up a refinance of his home a few weeks ago. I wrote up the deal, and monitored the rates. I locked him in under 5% with no points. We happened to time the bottom almost exactly. He obviously had a firm grasp of the historical significance of where the rates were at the time, apparently because he has a head for numbers.

It is said that a picture is worth a thousand words. With that in mind, I have prepared some charts based on this historic mortgage rate data. Since 38 years is a long time, one chart was way too wide, so I broke it up into four charts, one for each decade. The 1970s data for rates begins in April 1971, and for points begins in May 1971. The data ends in April 2009. To view the Historic Mortgage Rate Charts, Click the image below

Use the arrows to move through the four decades of data, double-click to zoom in or out. Hit the escape key to exit full screen.

Neither rates nor stock prices usually go straight up or straight down. The charts are not straight lines, they wiggle as they trend in a certain direction, with peaks and dips. There was strong demand in the auction of 7-year Treasury notes yesterday, and pressure on the Fed to keep buying Treasuries to keep rates low to help the economy in general and the housing market in particular. With that in mind I am looking for one of those dips to lock in my current customers at the best rate I can.

Being an investor helps me to track rates and trends. I do my own research, and subscribe to several investment newsletters. I don’t have a crystal ball, or I would be trading by day and in Las Vegas by night! However, in my circle of Loan Officer buddies I’m the one they look to for advance in this area. Several of my more credible advisors are warning us that we are seeing a bubble form in Treasuries, and at some point, it will pop.

The market price of Treasuries is trending downward. Many are getting out of them and into stocks, as more  investors are starting to believe that the recent stock market advances may be sustainable. They do not want to miss out on an historic chance to buy low and later sell high. Since interest rates are inversely related to bond prices, this puts upward pressure on interest rates. Here is a chart of U.S. Treasuries trends on Bloomberg’s Site

The Federal Reserve is in the market, purchasing Treasuries to help prop up prices and keep rates low. This is good in the short term, but unsustainable in the long run. Why? In financial lingo, what they are doing is called “quantitative easing.” In laymen’s terms, this is called increasing the money supply, or printing money. Don’t freak out just yet. In a deflationary environment, this can be done in a controlled manner and not lead to inflation. The long term danger would be to continue to do so after it is safe or necessary.

We’ve also been lucky so far. The risk premium, which is commonly measured by what is called the “Ted Spread”*, has decreased, which has slowed the rate of increase in interest rates. The question is, how long will our luck hold out? Given that the current market rates have not been this low in 38 years, since Freddie Mac started keeping records in 1971, I’d lock in these really low rates NOW! Sites like CNBC and Bloomberg track and chart this and other data, but I happen to like Bloomberg’s chart.

As always, you can click here or select the mortgage calculator on the right hand side of any page on my website to see how much you may save on your mortgage at today’s low rates. As of the writing of this article, we’re looking at between 4.875% and 5.125% for well qualified borrowers. This usually, but not always, means high FICO credit score, low Loan to Value, either purchasing or refinancing an owner occupied single family home. Details vary depending on the Loan Program, for example, Conventional, FHA or what’s being called Refi Plus, which follows most of the guidelines of the Obama Administration’s Home Affordable Refinance Program. FHA and Refi Plus are much more lenient with respect to credit scores and LTV.

*The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt (”T-bills”). The TED spread is an indicator of perceived credit risk in the general economy. From Wikipedia