Mortgage rates fall, likely to stay low

Though it destroyed thousands of homes in its path, Hurricane Katrina also has helped reinvigorate the nation's housing market.

Since June 2004, the Federal Reserve, led by chairman Alan Greenspan, has repeatedly raised interest rates in hopes of slowing down the overheated housing market, to avert the potential pop of a dot-com-like bubble. Katrina dealt a blow to Greenspan's efforts when it barreled through Louisiana and the Mississippi Delta, home to a large share of the nation's refining capacity.

With Katrina driving up already-high oil prices and threatening to slow the economic recovery, analysts now expect Greenspan to suspend or slow efforts to raise interest rates. In response, long-term interest rates, including mortgage rates, have dropped. Freddie Mac, the government-sponsored company that purchases mortgages, said yesterday that the fixed rate on a 30-year mortgage dipped to 5.71 percent, from 5.77 percent a week ago. That is the third consecutive weekly drop, down from 5.89 on Aug. 12.

John Bitner, economist for Eastern Bank, said it is unlikely that the rate drop will spur a major increase in mortgage refinancings. ''So many people have already financed out, because rates have been so low for so long," Bitner said.

But Katrina ''complicates the task of the Fed," said Nariman Behravesh, chief economist for Global Insight, a Waltham consulting firm. ''Lower bond yields mean lower mortgage rates, which could further fuel the housing bubble."

The nation's housing market is propelled by low mortgage rates, though some pockets of the country are seeing signs of a slowdown, including areas of the Massachusetts market, such as single-family homes. The state's home sales have dipped from 2004's record levels.

''I guarantee Greenspan never thought this could happen," said Summit Mortgage LLC's chief executive, Richard Fedele. The housing market will ''keep plowing forward," he predicted.

The Fed's post-Katrina predicament is a new twist in an economic puzzle for the nation's top economists, including Greenspan: What to do when mortgage rates remain low, even as the economy strengthens. Greenspan has said he does not see a bubble.

Instead, the Fed chairman said last month that the housing boom is an ''imbalance." He also said the equity building in America's houses is a ''newly abundant liquidity that can rapidly disappear."

Prior to Katrina, the Fed had been widely expected to boost short-term interest rates at its next meeting on Sept. 20.

Katrina ''puts that increase in some doubt," said Fred Breimyer, president of the New England Economic Partnership, a group of regional economists who track local trends. ''Whereas before it was semi-automatic," he said, ''now it's going to require some consideration and discussion."

Economists wonder why the Fed's months-long campaign to boost short-term rates has not driven up long-term bond and mortgage rates, as Fed increases historically have done.

Greg McBride, senior financial analyst for Bankrate.com, a North Palm Beach, Fla., personal finance website, has an explanation. ''Every time the Fed raises short-term rates, in the eyes of long-term bond investors, that keeps inflation at bay" and, in turn, keeps mortgage rates low, he said.

He predicted little or no impact of Katrina on the mortgage or housing market. As for the larger economy, McBride said: ''Time will tell."

Kimberly Blanton can be reached at blanton@globe.com.