Mortgage rates hit fresh 37-year low
Borrowing costs continue to fall, but that's failed to boost home buying.
NEW YORK (CNNMoney.com) -- Rates on mortgage loans are the lowest in the 37-year history of the Freddie Mac Primary Mortgage Market Survey, according to a weekly report released Wednesday.
The average 30-year, fixed-rate loan issued to borrowers declined to 5.1%, with 0.7 up-front points, for the week ending December 31, according to the survey.
The rate dropped from an average of 5.14% last week, which was the previous 37-year low. Freddie Mac (FRE, Fortune 500) began surveying lenders back in 1971. The 30-year fixed was at 6.06% a year ago.
The average for a 15-year, fixed rate loan was just 4.83%, its lowest level since March 25, 2004, when it hit 4.70 percent.
"Since the end of October of this year, these rates have declined by about 1-1/3 percentage points, or payment savings of approximately $173 a month for a $200,000 loan," said Freddie's chief economist, Frank Nothaft in a statement. "As a result, the number of refinance applications for conventional mortgages jumped over 500 percent between the weeks ending on October 31st and December 26th."
Unfortunately, the low interest rates have not spurred much of an increase in the number of new loans made to home buyers. According to the Mortgage Bankers Association, nearly 83% of all mortgage applications recorded last week were to refinance existing loans rather than to buy a home, indicating that low interest rates have so far failed to free up the frozen housing market.
Action from the Federal Reserve is also putting downward pressure on rates, according to Keith Gumbinger, of HSH Associates, a publisher of mortgage information that releases its own market survey.
The Fed announced in November that it will buy as much as $500 billion worth of mortgage backed securities (MBS) from Freddie Mac and Fannie Mae (FNM, Fortune 500) over the first six months of 2009. On Tuesday, it said it would start buying the securities next week.
"Just the fact that they said they'd do that put downward pressure on rates," said Gumbinger.
Lawrence Yun, chief economist for the National Association of Realtors, predicts the Fed action will help 30-year mortgages hold steady at around 5% or less over the next few months.
"The Fed is providing an additional buyer for the MBS, increasing demand for them and lowering rates," he said.
That should eventually boost the housing market, which has been crippled lately. Existing home sales fell 8.6% month-over-month to an annualized rate of just 4.49 million units in November.
The full impact of the low rates may not be felt for a while, however. "When rates fall, people respond, but the increase in sales usually follows by three to five months," said Yun.
That would coincide with the normally brisk spring selling season and, along with home prices that are the most affordable they've been in several years, could rejuvenate markets starting around March.
"Lower rates and falling house prices are making home ownership more affordable," said Nothaft. "House prices fell 18% over the 12-month period ending in October, according to the S&P/Case-Shiller 20-city composite index."
Despite these positive factors, Yun is still not totally optimistic about the boost they can provide housing markets.
"It's hard to dictate the confidence of consumers," he said.
Freddie Mac's is the longest running, and one of the most closely watched, mortgage market surveys around. The company surveys 125 lenders around the nation, asking them what the average rates are for their best customers who are putting 20% down on conforming loans, which generally have a cap of $417,000 in most markets or $625,00 in high-cost areas. 
