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TAX NEWS - 2010

Mortgage Rates Plunge to 4.58%, But Housing Looks Weak

How's this for clashing superlatives? Mortgage rates have fallen to their lowest levels of the last 50 years, and yet signed home-purchase contracts plunged by 30% in May from April.

There are simple explanations behind both, but it doesn't change the fact that the housing market will be struggling throughout the summer as it adjusts to a more normal market — one without the government propping up demand with tax credits.

Mortgage rates fell to 4.58% this week on 30-year fixed-rate loans, according to Freddie Mac's weekly survey. That beats last week's mark of 4.69%, which was already the lowest since Freddie's count began in 1971. Average rates on 15-year fixed-rate loans were down to a record-low 4.04%.

New concerns over the strength of the economy have pushed push down mortgage rates but many Americans aren't taking advantage of them either because they already did so last year, when rates repeatedly dipped below 5%, or because they can't qualify at today's tougher lending standards. Many borrowers don't have strong enough incomes or credit or they don't have enough equity in their homes to refinance.

Pending sales had been expected to fall in May, though perhaps not so dramatically, because it was the first month after a federal tax credit to spur sales expired. (Congress extended that tax credit yesterday through September, but it still only applies to sales contracts that had been executed by April 30). Newly signed contracts fell by 16% in May from one year earlier, according to the National Association of Realtors, and were down 30% from April.

It typically takes one-to-two months for homes under contract to close, which means that the subsequent declines in actual transactions won't show up until July and August.

As bad that will look, things certainly could be worse if mortgage rates had risen, as most analysts expected would happen when the Federal Reserve ended in March its purchases of mortgage-backed securities. That was the first major removal of government support, and thanks to the global economic worries, it was benign. The second major removal — the tax credit — certainly promises to make more ripples in the short term.

There's no doubt that the tax credit has pulled demand forward. The big question now is whether the market finds its footing in the late summer and early fall, or if it has to wait until next spring, or later, to do so. Mike Larson, real estate and interest rate analyst at Weiss Research, offers the following take:

What's the problem? Aren't homes cheap? Aren't mortgage rates at record lows? The answers are "yes" and "yes." But the overall economy is rolling over, consumer confidence is slumping and, most importantly, we just aren't creating jobs. It sounds simplistic, but it bears repeating: "No job = No house." And with so many Americans unemployed or underemployed, the housing market is going to keep hurting.
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