BOSTON - The U.S. government's efforts to revive the housing market have pushed mortgage rates down to record levels and helped stoke demand, but the prospect of further home-price declines could keep more reluctant buyers on the fence.
The average rate on a 30-year fixed mortgage is below 5 percent and last week dropped to a fresh all-time low. The previous nadir was set in April.
Mortgage rates jumped last spring but have declined relatively steadily since then, with investors hoping the economy is on the mend after the credit crunch. Rates fell sharply in November.
Greg McBride, senior financial analyst at Bankrate.com, said in an interview that two main catalysts are driving rates lower. First, the Federal Reserve has indicated it plans to keep short-term interest rates low for an extended period to help the economy along. The second factor is continued strong demand for government-issued debt despite fears that unprecedented spending to combat the financial crisis will eventually spark a bout of inflation.
"The demand is not just from other central banks buying Treasury bonds," the analyst said. "Institutional investors and hedge funds are looking to protect their year-to-date profits."
The S&P 500 Index has rallied about 60 percent from the March lows, with speculative sectors like banks and real estate posting the strongest gains. To safeguard these gains, some big investors have moved cash into Treasury bonds, pushing prices up and yields down. Mortgage rates are closely linked to the yield on the 10-year Treasury note.
The Fed's program to buy up to $1.25 trillion of mortgage-backed securities, which has been extended through the first quarter, has also contributed to easing rates. McBride estimated the Fed is buying about 80 percent of newly issued agency mortgage-backed securities.
"The Fed is not just a big fish in the pond - it's the only fish in the pond," he said.
Meanwhile, more than 90 percent of all home loans this year have been purchased by government entities such as Fannie Mae, Freddie Mac and the Federal Housing Administration.
This support has been keeping mortgage rates artificially low, but rates could jump when it is finally removed, some economists worry.
However, McBride thinks the Fed will extend its program to buy mortgage-backed securities to nurture the nascent recovery in the housing market.
"The Fed can't go from full speed to a dead stop in four months without a spike in interest rates," he said. "The economy is too fragile for the Fed to risk a rate spike."
Other signs that rates may head higher are if institutional investors start unloading government debt for riskier assets, or a general cooling to Treasury bonds.
Even with mortgage rates at record lows, some buyers are hesitant to buy a house because they believe they might get a better deal by waiting for even lower home prices.
During the housing bust, many areas of the U.S. saw peak-to-trough home-price declines in the range of 20 percent to 30 percent.
Residential real estate values have been falling for more than three years in the aftermath of the subprime mortgage crisis, which burst the housing bubble. A global credit crunch, recession, job losses and rising foreclosures have put the housing market into a deep freeze.
Yet there have been some signs of life in recent months, with many attributing the positive momentum to the federal tax credit for first-time buyers. The program has been extended to the spring, and a new credit includes some move-up buyers.
The home's purchase price and the loan's mortgage rate are the primary factors driving borrowers' monthly payments. Low rates are enticing, but some buyers are holding out for lower prices.
Those buyers could be beaten to the punch by investors scooping up properties, McBride said. A spike in mortgage rates is another risk.
Buyers could "win the battle" by waiting for better prices, but "lose the war" with a much higher rate on the loan, which increases the monthly mortgage payment, McBride added.
Economists are closely watching housing data for signs that the worst is over for the housing market.
On Tuesday, a real-estate industry group reported that pending home sales rose nearly 4 percent in October, the ninth straight month of gains.
Later this week, luxury builder Toll Brothers Inc. is scheduled to report full quarterly results.
Sales are typically slow during the winter months, so many analysts are waiting for the spring selling season to truly gauge the market's health.
In the home-building industry, there is little consensus on the outlook for housing.
"It's been a tough four years," said Larry Nicholson, chief executive of Ryland Group Inc., at the recent UBS Building & Building Products CEO Conference. "Hopefully, I believe we are at the bottom of this thing, and I think that business will start to pick up sometime next year."
However, others are less sanguine on the market's health.
"There is a lot of talk right now about the fact that the housing market has stabilized and is in recovery," said Lennar Corp. CEO Stuart Miller.
Yet the builder hasn't seen "clear evidence" of that, with the unemployment rate around 10 percent. "In fact, our experience would indicate that there's much, much more of a rocky bottom than we're hearing about in the press," Miller said.
"For the time being, we're certainly not facing the notions of Armageddon that we were feeling six months ago, but at the same time we have to be aware that the 'stabilization' that we've seen so far is tenuous at best," he said.
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