This is unprecedented. Since the end of October, the yields on FNMA mortgage-backed paper have fallen over two and a half percentage points, to an all-time low of 3.42% today. Yields on the reference 10-year Treasury have fallen one a half percentage points over the same period. The spread is almost back to "normal" levels now. All that is missing is for 30-year fixed rate conforming mortgage yields to fall to 4.5%, but that should follow shortly.
Several things are at work here. On the one hand, yields are unbelievably low in general because the market is convinced that deflation is going to be with us for many years. On the other hand you have the Fed, which is promising to keep short-term interest rates close to zero for a long time time; this effectively forces people to move out of cash and into longer-term and riskier investments in order to pick up yield. And then there is the fact that the Fed is now buying mortgage-backed securities directly (though in such relatively small quantities that I don't think that can explain the bulk of what has happened). Finally, we can't ignore the fact that the demand for mortgage loans must be weak, at least relative to the desire of investors to own mortgage-backed loans.
If anything is going to dispel the deflationary gloom that seems to pervade the market, it's things like this. Refinancing activity is already up significantly, and will likely rise much more. New applications for mortgages are up a bit, but should rise considerably in the months to come. We have two powerful forces converging—sharply lower mortgage rates and steadily declining home prices—and I don't think the savvy American homebuyer is going to fail to take notice of the arrival of an opportunity of a lifetime. People respond to incentives, and I would be very surprised if we don't see a bottoming in housing prices before summer.