By the end of last week, market analysts got their first indications of activity for the new year. From the latest issue of HSH’s Market Trends newsletter: “Mortgage rates were basically unchanged [last] week, which included the first days of 2009. Thinly traded markets, vacations and holidays being what they are, a lack of any real direction is pretty typical.

Overall, the average 30-year fixed rate mortgage nudged a lone basis point higher. HSH’s Fixed-Rate Mortgage Indicator FRMI rose to 5.89%. The overall average for the 5/1 Hybrid ARM slipped back by fourteen basis points, landing at 5.80% for the week, the lowest such average since February 2008.

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What or who can we thank for mortgage rates falling to levels unseen in over 40 years? Simply put, there are a trio of main factors that have allowed 30-year fixed-rates to drop. A recessionary economy, an ease in inflationary pressures, and the Fed’s new-found support for the market have all led to this historic opportunity for borrowers.

We need not explain the harsh realities of the current economy. Tuesday’s Consumer Price Index (CPI) report was just the latest evidence of the price free fall consumers are currently experiencing. Although due in large part to significant and steady declines in energy prices, even the Producer Price Index (PPI) has declined for four months in a row.

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The December 12 issue of HSH’s Market Trends Newsletter, “Mortgages: Loan Mods Not the Answer,” focused on last week’s slip in refi activity, the latest movement of mortgage rates, and the surge of loan-modification programs that have yet to produce their desired results.

“Conforming audiences are enjoying new, much lower costs for mortgage money and are continuing to respond to federal stimuli. Refinance activity did slip a little bit this week — not really surprising, given the impending holiday crush — but still managed to nearly hold onto last week’s big increase.”

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During the third quarter, American households paid down their debt levels for the first time in over 50 years, according to the Federal Reserve’s quarterly flow of funds report. Household debt shrank at an annualized rate of 0.75%, dropping from $13.94 trillion to $13.91 trillion, following a minimal increase in the second quarter. Home mortgage debt also shrank, but at an annualized rate of 2.5%:

The decline in household debt levels is evidence of the severe credit squeeze that is occurring as banks, saddled by billions of dollars of losses in mortgage debt, have tightened lending standards and made it harder for people to get loans.

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Good news for loan shoppers: the rate on a 30-year fixed rate mortgage dropped to 5.49% Wednesday evening from 5 .54% on Tuesday. Fixed rates have continued to ease since the Fed announced their $600 billion initiative to buy Fannie and Freddie debt and mortgage-backed securities (MBS).

The Fed’s plan to purchase $100 billion in F&F’s debt will serve to tremendously ease their costs. The central bank’s guarantee to purchase $500 billion in MBS has generated a new buyer in the market, accomplishing the goal of allowing fixed rates to drop further.

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