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Mortgage rates approaching 34-year low

The benchmark 30-year fixed-rate mortgage fell 14 basis points this week to 6.60 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points.

To oversimplify, falling mortgage rates can be taken as a sign that investors don't feel confident about the economy's recovery from last year's recession. But the economic statistics seem to reflect an economy that is improving in two-steps-forward-one-step-back fashion.

Inflation is tame, housing starts and building permits are up way more than expected and mortgage loan applications are on the rise. On the other hand, retail sales fell 0.9 percent in May. Economists had expected retail sales to fall 0.3 percent, so May sales were a lot slower than forecast. Industrial production inched higher, but not as much as economists predicted.

Jack Harris, research economist for the Texas A&M real-estate research center, says that for the past few months, he has been expecting the lukewarm economic news to send mortgage rates higher. It hasn't happened.

"I don't know why rates are this low. It's not a matter of supply and demand," he says. "I suspect that one day soon they will shoot up again."

There's no doubt that mortgage rates will rise again. The real head-scratcher lies in predicting whether rates will increase later or sooner.

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Borrowers are responding to the lower rates. Mortgage applications increased a seasonally adjusted 1.9 percent last week, according to the Mortgage Bankers of America. Almost 44 percent of mortgage applications come from homeowners who want to refinance their current loans.

From a home buyer's perspective, it's good that mortgage rates are so low, because it's a seller's market out there. With sellers in the driver's seat, house prices rise. Today's low mortgage rates make those expensive houses more affordable.

Real estate economists such as Harris keep track of housing supply -- the number of houses for sale divided by the number of houses sold in a month. Right now, the national housing supply is 4.8 months, according to the National Association of Realtors. That's a tight housing market, and it's expected to stay that way through the decade.

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