The chart above (from The Boston Globe) shows the volatility of mortgage rates over the past three months throughout the financial crisis. As you can see, actions taken by the government have caused the interest rate to jump around from a high of 6.46% to where they currently stand at about 5.47%.

Especially important was the announcement of a Federal Reserve plan to purchase $600B worth of mortgages and mortgage backed securities from Fannie and Freddie, which almost instantly dropped rates about a point down to their current lows.  Now there is news that additional action, specifically by the Treasury, that could lower rates to 4.5%.  Although details are lacking and nothing is definitive yet, the proposed plan only calls for the rate on new purchases to be reduced to 4.5% (not re-fi's).  Some, like James Lockhart (the chief regulator of Fannie and Freddie), have even speculated that interest rates could go below 4% with all the government intervention.

What is interesting is the consumer behavior throughout this period.  Mortgage applications spiked immediately after the Federal Reserve plan, but have dropped off since then as borrowers are choosing to wait and see if rates drop even more.

From the Globe:

Local brokers said customers are telling them they're holding out for even better news.

"A good percentage of my clients are waiting because they hear the rates will drop to 4.5 percent," said Brian McLaughlin, vice president of New England Home Funding in Fairhaven.

With details on the Treasury program lacking, and general uncertainty in the market, I can understand why people want to see what happens.  But the bigger question is, will these low rates have any impact on the market?  Some say yes, and others like Ed Glaeser say no.

Edward Glaeser, a Harvard University professor of economics, said a 4.5 interest rate won't motivate enough buyers to purchase lingering housing stock and increase prices. Moreover, the program could be expensive if payment defaults continue to rise.

Given the number of questions I have been fielding from clients over the past couple weeks, and discussed renewed interest in purchasing if rates get even lower, I suspect the interest rates will have a positive impact on activity.  I also agree with Glaeser though, in that this doesn't really do anything to correct the foreclosure issue which, in many parts of the country, is hammering prices.

Besides that, there are two other issues that come in to play in terms of how the rates affect market activity.  First, borrowers now have to meet very high qualification standards to get a loan at these rates.  Basically, if you have great credit, are putting 10-20% down, and have a track record of documented steady income, then you have a great opportunity to get historically low rates.  If not, you probably aren't going to touch these rates.  Clearly in the past the qualification standards were largely a joke, but now the pendulum has swung too far in to other direction. Second, we are talking about conforming loans (which I wrote about here) for these rates .  So in high cost areas (like Downtown Boston) many of the properties being purchased are above those limits, which obviously limits the impact for our market and others in similar situations.

Either way, hopefully the Treasury will make an announcement soon!  Uncertainty does nobody any good....