Spotlight on Financial Services

Trends in Mortgage Rates and Home Sales

During most of the past year, declining residential mortgage rates have encouraged consumers to purchase homes or to refinance residential mortgages. As shown in the table below, from June 2001 through February 2002, average rates on 30-year, fixed-rate mortgages dropped from 7.33 percent to 7.01 percent. Over the same period, rates on 15-year fixed-rate mortgages fell from 6.86 percent to 6.49 percent. However, the tide may be turning. Note that the rates on each type of mortgage rose from February to March in 2002.

Monthly Average Rates on Residential Mortgages and Housing Starts June 2000 to February 2001
Date	15-Year Fixed Rate (%)	30-YearFixed Rate (%)	HousingStarts (millions, annualized rate)
June-01	6.86	7.33	1.63
July-01	6.85	7.31	1.66
August-01	6.65	7.11	1.59
September-01	6.50	6.96	1.58
October-01	6.27	6.77	1.18
November-01	6.33	6.85	1.16
December-01	6.72	7.28	1.602
January-02	6.62	7.16	1.713
February-02	6.49	7.01	1.785
March-02	6.60	7.10	1.646

Sources: HSH Associates and National Association of Home Builders.

Since the cost of financing homes has declined, it is not surprising that home starts are related to mortgage rates. In addition to some seasonality in housing starts, there appears to be a lagged effect, most likely because the mortgage interest rate climate influences the decision to purchase new homes. Notice that the low 30-year mortgage rates in October and November 2001 were followed by a rather sharp increase in housing starts in January and February 2002.

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