MARKET RECAP

“Down, down, down” is the mantra being nauseatingly repeated on Wall Street these days. Such abject pessimism should come as no surprise, considering that many of America 's mightiest corporations have lost an average of 21% of their value since the first of October. Leading the downward brigade is once-impregnable General Motors, whose stock price has dropped nearly 50% this month alone, jeopardizing its very existence.

But stock prices and market mood weren't the only things down last week; mortgage rates were down as well. One week after posting their biggest jump in 21 years, mortgage rates reversed course and gave back most of the increase. Bankrate's latest survey had the prime 30-year fixed-rate mortgage averaging 6.32%, the prime 15-year fixed-rate mortgage averaging 5.93%, and the prime 5/1 adjustable-rate mortgage averaging 6.49%.

Why the spike in mortgage-rate volatility? Most capital markets have seen increased volatility due to the seemingly intractable problems associated with the current credit crises. Debt markets have witnessed wide swings in interest rates and bond yields. Mortgage rates are part of the debt market, so they aren't immune. Going forward though, mortgage rates could stay down. It's becoming increasingly obvious that the U.S. economy is approaching, if not in, a recession. Interest rates tend to fall during economic contractions because of decreased credit demand. Decreased demand, in turn, tends to ease interest rates.

The good news is that existing homes sales aren't staying down. Purchases of existing homes jumped 5.5% last month to a 5.18 million annual pace, the highest pace in a year. Of course, foreclosure-related sales played a large role in the increase, accounting for nearly 40% of last month's total. But 80% of the purchases were for primary residences and not for investment, suggesting the market is stabilizing. Sales figures for this month and next will be critical in determining whether sales are really beginning to climb from recent bottoms.

Lower Rates Help, But Not as Much as More Liquidity

It's all but guaranteed that the Federal Reserve will lower interest rates on Wednesday. Indeed, the price of fed funds futures contracts (instruments that allow traders to bet on interest rate movements) rose to 99.08, indicating a 100% chance that the Fed will cut the fed funds rate by a half a percentage point to 1%.

Lower rates are appreciated, to be sure, but only if lenders are willing to lend – and that's still the bugaboo of this market. Fed Chairman Ben Bernanke acknowledged as much earlier this month when he noted that even households with “good credit” were finding it difficult to get mortgages. Simply put, banks are hoarding cash, and the influx of government money – from the recently approved $700 billion bailout – won't necessarily stop the hoarding.

The defensive posture banks have adopted is creating a quandary for the Fed, the Treasury Department, and Washington policymakers, all of whom are trying to prime the credit-flow pump. But while there are small signs of improvement – notably a modest drop in the rate banks charge one another to borrow money – their efforts are being blunted by banks' reluctance to loosen their purse strings. Until that happens, and some pundits expect it won't happen until 2009, the housing and mortgage markets will continue to sputter and government officials will remain mired in their quandary.