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Rate Drop Tempts Buyers Back Into Market

If you're still in shock about the 8.64 percent mortgage interest rate from May, you can start breathing again. The average rate for a 30-year fixed rate mortgage finally dropped below 8 percent in August 2000 according to Freddie Mac. With the economy cooling and taking the heat off the housing market, late summer might be the time to resuscitate your home search.

And it gets better. The Federal Reserve met this month and voted not to increase short-term interest rates, a move that bodes well for homebuyers. The Fed's Open Market Committee watches the economy for overheating, and has been raising interest rates recently to slow things down. When the Fed raises rates investors get nervous about inflation, and presto, mortgage rates go up. When the Fed leaves interest rates alone, as it did this month, the risk of inflation is minimal and slower but sustainable economic growth is ahead. That's the prediction. If it wants to, the Fed can whip out the crystal ball and change its mind at the next meeting.

When the average fixed mortgage rate topped 8.64 percent in May, it was the highest rate in five years. 7.96 percent was the new average rate for the week of August 14, the lowest rate since December 1999 according to Freddie Mac. It may not seem like much but any homebuyer that scoffs at .68 percent should take another look. A homebuyer who took out a $200,000 mortgage in May, when fixed-rate mortgages averaged 8.64%, had a monthly mortgage payment of $1,558. By contrast, a homeowner who took out a $200,000 mortgage at the current 7.96% average had a monthly payment of about $1,462. That's a difference of $96 per month, and $1,152 per year.

If you're dreaming of rates in the 6 percent range coming back, keep dreaming. According to Freddie Mac economist Rob Van Order, rates could drop a little more if the economy continues to cool, but we're not likely to see 6 percent interest rates again for the foreseeable future. Most analysts expect to see rates in the 7.75 to 8.25 range. That's not bad, if you look at historical averages. Want a real dose of sticker shock? Try the highest rate ever recorded by Freddie Mac: 18.63%. The year was 1981.

Another good sign is that housing starts for year 2000 are now at 1.51 million, and dropped 3.3 percent in July. That's a very good but stable level, according to Freddie. What that means for consumers is that the housing market isn't quite as hot nationally. If you live in a major metropolitan area, demand might still be ahead of the supply of available homes.

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