Mortgage rates are collapsing (2)

Wow, interest rates just keep tumbling. Most importantly, mortgage rates are tumbling. The spread between current coupon FNMA MBS securities and 10-year Treasuries has very quickly come down to levels that are more in line with historic norms. They might go a bit lower, but we've most likely seen the bulk of the declines. With FNMA issues carrying a coupon of roughly 3.8%, you can expect to see rate on 30-year fixed-rate, conforming mortgages fall below 5% very soon, with 4.5% as a not-impossible target.

Since the end of October, mortgage rates have effectively fallen by about 2 percentage points. That translates into a reduction of about 20% in monthly mortgage payments. And that makes housing about 25% more affordable for most folks. Combine that with the 30% reduction in inflation-adjusted home prices as recorded by the Case-Shiller index since 2006 (at which time mortgage rates were almost as high as they were in October), and the bottom in housing prices is now approaching at a much faster rate. This is simply excellent news, because the survival of the banking industry will be a big source of uncertainty unless and until housing prices stop falling.