Last week the interest rate on 30 year mortgages fell below 4 percent to 3.94 percent, a level not seen since the 1940’s, when rates fell as low as 4 percent (but not any lower) due to a special program for war veterans. The decline in rates comes in response to continuing restrictive credit conditions and an overall depressed housing market. A drop in 30-year mortgages below 4 percent represents the lowest interest rate ever recorded by Freddie Mac since its inception in the early 1970’s. Likewise, 15-year mortgages fell to 3.26 percent down .02 percent from the week prior.

No Surprise

This should not come at too great of a surprise given that mortgage rates generally follow the yield of 10-year Treasuries. Recently, treasuries have been on a decline amidst continued anxiety about the European debt crisis and fears of a looming recession in the U.S. economy. Treasuries fell below two percent over the same period and closed as low as 1.78 percent. While these low rates are great for qualified borrowers, the low rates haven’t been as effective as one would think in stimulating the real estate markets.

Unemployment has remained relatively unchanged, hovering over 9 percent, while credit remains tight and housing values continue to fall. In fact, the Federal Reserve recently announced its plan to lower borrowing costs even lower by substituting long term debt in place of its shorter term securities.

Commentators

Commentators agree that these low interest rates do little in the way of boosting the economy, and rather than being a good thing merely reflect the fragility of the U.S. and global economies. Additionally, the old rule of thumb regarding the relationship between falling interest rates and increasing buyers (or refinancers) no longer holds true in our shell-shocked housing market.

Rather, today the number of new mortgagees is directly correlated to the amount of available credit, the number of people unable to sell their home because it’s underwater or because otherwise qualified buyers are waiting on the sidelines in hopes that property values will drop further.

Home-loan applications declined 4.3 percent, during this same period, while refinancing fell even further, declining by 5.2 percent and new purchases fell .8 percent.

Low Interest Rates No Helping Enough

Many say that the inability of low interest rates to boost the overall housing market exemplifies policy makers’ inability to pass legislation that benefits homeowners in any meaningful way. Adding to this problem, Federal Reserve Bank of Boston president Eric Rosengren noted that falling home prices have disrupted the effectiveness of monetary policy. Currently, the availability of credit is more influential to overall market conditions than the cost of borrowing.

White House Moves

Indeed, the White House has been trying different policy measures to increase the ability for existing homeowners to refinance their mortgage at a lower rate. So far, the programs have not been able to reach enough borrowers to have the meaningful impact envisioned by proponents of the legislation. Perhaps, this shows that market conditions are worse than the politicians know, with many homeowners in default or having already defaulted.

The average rate on 5-year adjustable rate mortgages fell below 3 percent to 2.95% in the same period.

Average mortgage rates are calculated from Freddie Mac surveys completed by various lenders across the country from Monday to Wednesday of each week.