It was hard to miss events on Wall Street last week, but the
attention given to the Dow and its 500-point fall on Thursday mask
an equally important story: Mortgage rates hit an eight-month low
and are within striking distance of the lowest rates since World
War II.

Normally low rates are a cause for cheer but a caution is needed
in this particular case. Here’s what’s happening and why:

As the Dow was burying itself into a trench,
Freddie Mac

issued its weekly rates report. It told us that 30-year fixed-rate
mortgages (FRMs) averaged 4.39 percent, down from 4.55 percent the
week before. The 5-year Treasury-indexed hybrid adjustable-rate
mortgage (ARM) averaged 3.18 percent. That product was down from
3.25 percent a week earlier.

These mortgage quotes are unusual for three reasons:

First, the drop with fixed-rate loans–16 basis points in a
week–shows an unusual amount of movement in the marketplace.

Second, the mortgage quote itself–4.39 percent for fixed-rate
financing–is stunningly low.

Third, we’re not that far from the all-time record low, the
November 11, 2010 report which told us that fixed-rate mortgages
could be had for 4.11 percent.

You could look at these rates and realize that they are
literally the way to prevent millions of foreclosures. Just
refinance everyone with today’s mortgage rates and we would
instantly end the toxic loan crisis, lower monthly costs and create
more discretionary dollars for households to spend, something that
would greatly help the economy.

But, unfortunately, the good news with mortgage loan rates may
not offer much practical help. People still need to qualify to
refinance, and that requires income.

Unemployment

We have large numbers of people unemployed. The
Bureau of Labor Statistics

reported last week that unemployment was down to 9.1 percent and
117,000 happy people found new work; unfortunately, a 9.1 percent
unemployment rate remains high by historic standards. Also, we
don’t know what the new workers are doing. They may now have jobs,
but what kind of jobs do they have? Minimum wage? Marginal
work?

If you’re an investor watching home prices and jobs you have to
wonder where to put your money. In a risky world lower home values
in the U.S. and bad unemployment numbers do not suggest much
confidence in the stock market–thus the 500-plus decline on
Thursday.

The catch is that while things look bad to us in the U.S., they
look even worse in many other places. Unlike Syria and Libya, we
don’t have government tanks and sharpshooters in the streets. Our
currency is stronger than the cash in Iceland, Greece, Spain,
Portugal and maybe Italy. Unlike steelworkers in China, no one in
the U.S. works 16 hours a day, seven days a week–for
75 cents an hour

.

The result is that those with cash are taking their money and
looking for a nice secure place to keep their dollars. Stock
represents a lot of risk today so arguably one of the best places
at the moment to keep cash is in the form of paper from the U.S.
government. Another good place is bonds, with their regular
interest payments.

As it happens, as more money flows into bonds mortgage rates go
down. And that’s how last Thursday the stock market crashed and
mortgage rates tumbled.