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Mortgage rates don't move much

By Holden Lewis . Bankrate.com

A week after mortgage rates zoomed upward in overreaction to a minor change in wording by the Federal Reserve's rate-setting committee, rates have settled back to about where they were before the Fed gathering.

The benchmark 30-year fixed-rate mortgage remains unchanged at 5.72 percent, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.96 percent.

The benchmark 15-year fixed-rate mortgage rose 3 basis points to 5.05 percent. A basis point is one-hundredth of 1 percentage point. The benchmark 1-year adjustable-rate mortgage also rose 3 basis points to 3.68 percent.

On Jan. 28, a Wednesday, the Fed's rate-setting committee ended its regular meeting and issued a statement whose meaning was similar to that of the statement issued six weeks earlier, but expressed it differently. Wall Street inferred that the Fed was building the foundation for higher rates in a few months. In response, Treasury yields and mortgage rates went up for a few days.

Coincidentally, Bankrate.com's weekly mortgage rate survey is conducted on Wednesdays. Bankrate's survey had been completed before the Fed's announcement the afternoon of Jan. 28, so the survey didn't catch the spike in Treasury yields and mortgage rates. But rates did go up briefly, then went back down as Wall Street realized that the economic picture hadn't changed. The economy continues to grow, but employment isn't growing as fast. The weak job market helps keep inflation low, and that keeps interest rates down.

Low interest rates keep house payments low, and that makes houses more affordable. That's the not-surprising conclusion of the National Association of Realtors' most recent housing affordability indexes.

The Realtors' best-known affordability survey, called the composite index, was 139.2 for the last three months of 2003, meaning that a household earning the median income had 139.2 percent of the income needed to buy the median-priced single-family home after making a 20 percent down payment. In other words, the affordability index implies that the typical household has more than enough money to buy the typical house. That might come as news to Californians, Bostonians and anyone else living where houses are expensive, but those places aren't "typical."

First-time buyers aren't typical, either. They rarely make 20 percent down payments -- 6 percent is about average -- and they aren't yet in their peak earning years. The Realtors have a first-time affordability index that takes these factors into account. The index assumes that the typical first-time buyer is age 25 to 44, makes a 10 percent down payment, pays mortgage insurance on the loan, and buys a starter home that costs 85 percent of the area's median house price.

According to the Realtors' first-time buyer index, the typical first-time buyer household earned 79.9 percent of the income needed to buy a starter home with a 10 percent down payment.

"The index shows that the typical first-time buyer could afford a home costing $116,000, which is below the median price in most metropolitan areas," says Walt McDonald, president of the National Association of Realtors. "The interesting thing is first-time buyers account for four out of 10 transactions, so they're finding ways to do it -- either with a smaller starter house, a condo, or some kind of sharing arrangement."

He certainly is right that people are finding ways to buy homes. A national homeownership record was set in 2003, the federal housing department trumpeted loudly this week. According to the Census, 68.3 percent of American households are homeowners. The previous record, 67.9 percent, was set in 2002.

Minority households, many of them first-time owners, led the way. In the fourth quarter of 2002, 47.7 percent of black households owned their homes; a year later, 49.4 percent did. If that pace of growth continues, more than half of black households could be homeowners sometime in the first half of this year. That would be a historic achievement for the United States and a reason for the Bush administration to boast.

The administration has been trying to push up the minority homeownership rate by providing down-payment assistance to low-to-moderate-income households and by allowing the private down-payment assistance industry to exist. The Federal Housing Administration has asked Congress to allow it to insure no-down-payment mortgages; right now, FHA loans require a down payment of at least 3 percent.

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