The 30-year residential mortgage rate fell below 4 percent in early October, the lowest level in the 4 decades that Freddie Mac has maintained records. Rates have inched up in the last two weeks but remain near the historic low. On account of Fannie Mae and Freddie Mac’s unique relationship with the federal government, residential mortgage rates are almost perfectly correlated with long-term Treasury rates; since 1971, the average spread between Treasuries and the long-term mortgage rate has been just 180 basis points. The current decline in the mortgage rate does not reflect an improving outlook for the housing market. Rather, it captures that global financial markets’ elevated risk aversion pushed the Treasury rate to its own record lows in late-September and early-October.

The most current data on housing activity suggest that extraordinarily low costs of financing will fail to spur an upturn in sales volume or pricing. Nor will the Administration’s latest initiatives related to bank refinancing (see the October 18 Fox News interview) extend to include potential new homebuyers. The binding constraint for households that might transition to ownership given real financing costs below 2 percent and rising rental rates relates to difficulties in qualifying for mortgages, requirements of larger down payments, and the possibility that prices may yet fall further. Absent robust job growth, these issues are unlikely to resolve before mortgage rates start to rise.

Dr. Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor at the Wharton School of the University of Pennsylvania. A noted economist and active commentator on issues of national and global economic significance, Dr Chandan is amongst the commercial real estate industry’s leading voices in relation to capital and credit markets and the dynamic relationship between the economy, regulation, and market performance. http://www.Chandan.com