A month or so ago, we thought rising mortgage rates (or at least rates maintaining a higher plateau) would be the norm.

So much for prognostications: Mortgage rates dropped again this week; this time, on a disappointing jobs report, which showed the economy in March created far fewer jobs than most economists had expected. Jobs reflect economic growth, and if the economy isn't growing neither is loan demand... and neither will interest rates.

The Federal Reserve remains determined to keep mortgage rates low for the relevant future. Minutes of the most recent meeting of the Fed governors reveals most still support the on-going policy of purchasing $85 billion in longer-term Treasury and mortgage-backed securities each month.

The Fed's demand for these securities helps keep mortgage rates low because private buyers know there is a ready market for these securities, thus mitigating interest-rate risk – the risk of capital loss should interest rates rise.

Of course, rates are only one aspect of a lending market; quality of underwriting is another. The quality of mortgage loans over the past few years have undoubtedly gotten better. Moreover, the market as a whole, with government support, has improved markedly.

For instance, overall foreclosure and delinquency rates continue to improve. For this, we can look to stricter underwriting standards.

Of course, stricter underwriting standards can be a doubled-edged sword, especially if they are too strict. It can be argued they are. Most of us have had to deal with (particularly in the conventional side of the market) a potential borrower who was denied funding but was a reasonable credit risk.

The regulatory environment obviously impacts underwriting standards and loan-grant decisions. This environment certainly lists toward safety (perhaps too much), but at least a couple Federal Reserve officials are voicing support for less restrictive regulations.

Despite tighter lending, housing continues to be the one bright spot in the economy. Prices remain on an upward trajectory, as does home-builder activity. We don't expect these trends to change.

We say that because home prices remain far below their peak. In 2005, the median price of a new home was nearly $230,000. Today, it's closer to $175,000. What's more, homes are not only cheaper on an absolute basis, they're cheaper relatively speaking: Back in 2005, a new home went for 4.2 times the median buyer's income. Today, the ratio is down to 3.25 times.

There is still plenty of room for housing to run. Over the past 50 years, housing starts have averaged 1.46 million per month. In early 2006, the pace was more than 2.2 million. Today, housing starts run at a rate of less than 1 million. Looking ahead, we expect housing starts will remain an important economic propellant.

 Courtesy of Jessica Regan.

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