30-year mortgage rates drop, but buyers wary

  • Article by: ELIZABETH DEXHEIMER , Bloomberg News
  • Updated: October 3, 2013 - 7:45 PM

Economists are worried that a U.S. debt default could cause financial panic.

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Despite a drop in mortgage loan rates to a three-month low Thursday, the partial government shutdown could have a chilling effect on home sales because many federal workers are not being paid.

Photo: STEVEN SENNE • Associated Press,

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Mortgage rates for 30-year U.S. loans fell to a three-month low after a partial government shutdown pushed down yields for the Treasuries that guide consumer debt.

The average rate for a 30-year fixed mortgage dropped to 4.22 percent, the lowest since June 20, from 4.32 percent, Freddie Mac said in a statement Thursday. The average 15-year rate decreased to 3.29 percent from 3.37 percent, the group said.

While the shutdown may have a minimal impact on mortgage rates immediately, a potential U.S. debt default and market expectations for when the Federal Reserve may begin tapering the pace of its monthly bond purchases will be more consequential, said Jed Kolko, chief economist for Trulia Inc., a San Francisco-based real estate website.

“One effect of the shutdown is, if it lasts, it would reduce purchases among consumers because federal wages aren’t being paid,” slowing economic activity and pushing rates lower, Kolko said Wednesday. The debate over raising the country’s debt limit “is a different story. In the unlikely case that the government defaults on its debt, it would probably cause financial panic and cause interest rates to spike.”

Treasuries gained after the U.S. government began its shutdown on Oct. 1 as investors sought refuge from uncertainty. Ten-year yields decreased to almost a seven-week low Wednesday, the biggest slide in two weeks.

Debate over the shutdown may bleed into discussions about raising the debt ceiling, a bigger concern for the U.S. economy. Treasury Secretary Jacob Lew said this week that the U.S. has begun using the last measures available to avoid breaching the limit on Oct. 17.

The average rate for a 30-year loan surged to a two-year high of 4.58 percent in August from a near-record low of 3.35 percent in early May. Mortgage applications for home purchases fell 5.6 percent in the week ended Sept. 27.

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