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Mortgage Rate Dips to 5.38%, Easing Pressure on Housing

Mortgage rates took a sharp drop in the past week, providing needed help for a housing industry that had seen a dropoff in buyers as borrowing costs have escalated.

Mortgage rates down
Mortgage rates down

The rate for a 30-year fixed dropped 0.21 percentage points to an average 5.38 percent for the week ending June 18, after reaching its highest point since late November the previous week, according to data from Freddie Mac.

The move had coincided with a fall in mortgage applications and fears that a housing recovery would be impeded by higher rates.

"Concerns about eventual inflation drove bond yields and mortgage rates higher in recent weeks," said Greg McBride, analyst at Bankrate.com. "That has been tempered by the reality of continued weakness in the economy."

Mortgage rates had jumped to 5.59 percent as the 10-year Treasury note yields hovered in the 5 percent range. Concerns about inflation amid a wave of government borrowing and the corresponding drop in value of cash-based assets drove investors from longer-dated US debt, sending yields higher.

That trend has eased somewhat amid a growing sense that inflation is probably not a near-term problem.

Mortgage rates, then, are likely to stay fairly range-bound until the economy shows signs of breaking out, McBride said.

Mortgage rates can fluctuate on a daily basis. Various brokers reported that rates moved higher Thursday (see box) as yields on the 10-year Treasury surged amid a firming in the economy and an auction next week of government debt.

"Mortgage rates bob up and down. For homeowners that are holding out for sub-5 percent rates, sorry but I think that ship has sailed," he said. "The low 5s might be the best we can hope for."

In addition to the drop in 30-year rates, the 15-year is now at 4.89 percent.

Borrowing costs should not be an impediment to those looking to buy a house, McBride said.

"Make no mistake, these rates are low and they're going to stay low," he said. "The Fed still has approximately $1 trillion in its buyback program to put to work for the balance of 2009. That will continue to keep a lid on mortgage rates."

The government has embarked on an aggressive program to keep mortgage rates lower. It has set a goal to buy up to $1.25 trillion of mortgage-backed securities as well as $300 billion in Treasurys and $200 billion of agency debt such as those loans backed up by Fannie Mae and Freddie Mac.

Yet that might not be enough to trigger a full-scale housing recovery.

"Inventories are being worked off. There's tremendous affordability, particularly for first-time homebuyers, but mounting losses will continue to add foreclosures and be a big drag on home prices," McBride said. "That effect will be magnified in certain hard-hit markets."

The 30-year fixed-rate mortgage this year has been as low as 4.78 percent on April 2, the lowest since Freddie Mac began compiling its Primary Mortgage Survey in 1971.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.