Personal Finance Blog By MoneyRates - May 2010

Average 30-year fixed mortgage rates dropped under 5 percent this week to their lowest level so far this year, according to the latest survey by Freddie Mac.

With rates continuing at such low levels, mortgages are about as affordable as they can get for buyers with good credit. But if you're looking to move up in the housing market, today's low rates won't do you much good unless you can sell your current house for a price that leaves you some equity.

Is It Possible to Have Equity in Your Home?

Recent news from the National Association of Realtors is encouraging. The association reported 91 of the 152 markets it tracks showed year-over-year positive growth in the first quarter of this year, compared to just 67 areas reporting positive growth in the fourth quarter of 2009 and 30 metro areas in the third quarter.

But that positive growth occurred when the homebuyer tax credit was still in effect. The big question is how the market may fare since the tax credit ended April 30.

Just two weeks into May, and we're already seeing some troubling signs. One week after the tax credit expired, the Mortgage Bankers Association reported that seasonally adjusted index for mortgage applications for purchasing homes dropped 9.5 percent from a week earlier. The unadjusted purchase index declined 8.9 percent compared to the previous week and 0.6 percent from the same week a year earlier.

And Trulia reported that the share of home listings with at least one price cut increased to 22 percent from 10 percent in the final week of the tax credit.

Real estate mavens say we won't know whether the housing market can get on its feet without the crutch of the tax credit until the home buying season wraps up at the end of this summer.

It's been a heck of a ride.

Down a few hundred points one day. Up a few hundred a few days later. Plus, a spectacular, thousand-point free-fall thrown in for good measure. The Dow Jones Industrial Average has more resembled a roller-coaster than an index of carefully-thought-out investment choices.

Daunting as all this volatility may be for stock investors, it may even give bank depositors reasons to shake their heads ruefully. It seems that anyone waiting for savings account rates, money market rates, or CD rates to rise may have to wait a little longer as a result of the recent market turmoil.

Why should disruptions on Wall Street keep bank rates low? One reason is the flight to safety that occurs when things get scary on the stock market. People pile into bonds, sending bond prices higher, and bond yields lower. Across most of the yield curve, bond yields have taken a significant step backward this month.

Also, the recent volatility on Wall Street, while exacerbated by an apparent trading error and a moderate degree of panic, is also rooted in broader economic concerns. While much of this concern centers on Greece and other European debt problems, given the inter-connectedness of the global economy, those problems threaten to drag on U.S. growth as well. This, in turn, gives policy makers yet another reason to go slow on returning short-term interest rates to normal levels.

Indirectly therefore, a rough week on Wall Street translates to a rough week for bank rates. Then again, bank depositors can sit back and watch the instability in stocks with some feeling of security -- low bank rates are certainly better than sudden losses.

Almost lost last week in the drama of the Dow's 1,000-point dive and riots over financial instability in Greece was this nugget of good news: 30-year mortgage rates dropped to their lowest level since March.

According to mortgage finance company Freddie Mac, 30-year conventional mortgages averaged 5.00% last week, down from 5.06% the previous week. Some historical perspective helps to illustrate how extraordinarily low 5.00% mortgage rates are -- and how unlikely they are to continue.

Mortgage rates have been around 5% since the beginning of 2009, so that level might almost begin to seem normal. However, in over 35-years of mortgage history prior to 2009, 30-year mortgage rates had never dipped below 5.23%. In fact, mortgage rates below 6% have been uncommon historically. Prior to 2009, yearly averages for 30-year mortgages had ranged from a low of 5.83% in 2003, to a high of 16.63% in 1981.

Today's mortgage rates represent an extraordinary opportunity -- an opportunity for new home buyers, or for existing home buyers to refinance. The history should remind people not to get complacent about that opportunity, because if mortgage rates revert back to normal, financing a home will become significantly more expensive.

Interest rates tend to reflect the mood of the financial markets, with pessimism bringing lower rates and optimism bringing higher rates. Last week that mood turned toward pessimism, but the markets are fickle. A spate of strong economic news, or a whiff of inflation, could quickly send mortgage rates higher again. That makes this a good time to lock in low rates while you can.

With the announcement on Friday that the U.S. economy added 290,000 jobs in April--the biggest monthly gain in four years -- you'd think we'd be hearing champagne corks popping across the country.

Unfortunately that statistic was accompanied by another, less uplifting number. The unemployment rate rose from 9.7 percent to 9.9 percent.

What Gives?

The first number comes from the government's payroll survey, which asks employers how many people are working for them. The second number comes from the household survey, which asks adults whether they're employed and whether they're looking for work.

Understandably, after months of looking for jobs to no avail in a tough recession, some people just give up, and when they do, they're no longer counted among the unemployed. With the recent thawing in the economy, some of those folks who gave up are now hitting the pavement again in search of jobs. So actually the rise in unemployment signals a rise in hope, and that's a good thing.

But the big question is: when will that unemployment rate finally come down to a decent level of, say, 5 percent?

Not for years, according to a speech earlier this week by Federal Reserve Bank of Boston CEO Eric Rosengren, who told the Money Marketeers of New York University that even with fast economic growth--faster than we've seen in previous recoveries--unemployment won't reach 5 percent for at least a few years.

Investor's Business Daily offers readers this sober reminder Friday: just to keep unemployment steady, businesses must add 119,000 jobs a month to accommodate new job seekers, and the U.S. was down 8.2 million jobs at the end of 2009 from the start of the recession.

What does unemployment have to do with interest rates? A lot. Rosengren said low rates are still needed to encourage the economic recovery. Rosengren is a member of the Federal Open Market Committee, which sets the target for the federal funds rate. Banks then follow suit with the interest rates they offer consumers.

Bottom line: it'll be a while before you see much better rates on savings and money market accounts and CDs.

At the end of last week, the Federal Deposit Insurance Corporation (FDIC) issued a consumer alert warning of a bogus e-mail purporting to be from the FDIC. The e-mail offers recipients $50 for participating in a survey, and asks them to click on a link to a web site. The FDIC alert states that the probable reason for this e-mail is either to collect sensitive information from respondents, or to download malicious software onto the computers of respondents.

The FDIC alert reminds consumers that the FDIC does not send out unsolicited e-mails to consumers. Although the survey approach is new, this is not the first time bogus e-mails claiming to be from the FDIC have been sent out. Another common approach to obtaining sensitive information is to send e-mails claiming to be from your bank. These may even have links to very realistic-looking web sites that are really just fronts for collecting private information.

MoneyRates.com reminds you of a few common-sense pointers:

• Attempts to collect sensitive information may come by e-mail or telephone, but the same rule applies: unless the caller or the e-mail address is well known to you, don't accept it as genuine unless it is verified by a contact you make via a publicly-listed number for the institution.
• Certain information should rarely be given out in response to incoming queries. This includes your social security number and account numbers for savings accounts, money market accounts, CDs, or checking accounts.
• Never get flustered into giving a quick response. Legitimate organizations will give you time, allow you to call back if you prefer, and give you a reasonable explanation for why the information is needed.