By Ylan Q. Mui, Published: August 8
Washingtonpost.com

The stock market sell-off over the past week has created a surprising - albeit likely short-term - silver lining for consumers: ultra-low interest rates.

The weekly average rate for a 30-year fixed mortgage has dropped to 4.39 percent, according to mortgage giant Freddie Mac, the lowest level this year. Mortgage brokers say that is fueling a boom in refinancing and piquing the interest of new home buyers who had been waiting on the sidelines.

"I've totally been hitting ignore on my cellphone because it's so overwhelming," said Brad Cohen, a senior mortgage lender for Bethesda-based Eagle Bank. "I don't want to even get up to go to the bathroom."

Cohen said he has been pulling 14-hour days and received more than 300 e-mails before noon Monday requesting information about locking in the new rates. He estimates he has secured $14 million in loans over the past week.

The fluctuations in the stock market, however, are creating headaches for consumers. Many workers' retirement plans are linked to the major indexes, which suffered their worst decline Monday since the depths of the financial crisis in 2008. The Dow Jones industrial average has lost about 14 percent of its value, or more than 1800 points, since the slide began two weeks ago.

"In a down market with an index fund, you've got the full down," said Bill Ebsworth, chief investment officer for Fidelity Strategic Advisers, but he cautioned against trying to overcorrect for the stock market slump. "The worst thing you can do is take a rash action and go 100 percent one way or another."

Many analysts were caught off guard by the rapid decline in interest rates. The downgrade of U.S. debt by ratings agency Standard & Poor's was expected to result in higher borrowing costs for Uncle Sam, just as consumers with poor credit scores must pay more for loans.

But the volatile stock market has scared off investors. They flocked to the relative security of U.S. Treasurys despite the downgrade, pushing down the interest rate. Rates for mortgages and other consumer loans tend to mirror the movements in the U.S. bond market.

Mortgage rates had been trending downward since hitting a high in February of more than 5 percent for a 30-year fixed loan. But they dropped sharply last week as rumors of the downgrade began to surface. That's when the phone began ringing at PMC Mortgage in Alexandria.

"They smell a way to save some money on their debt," said Henry Savage, the firm's president.

Alex Perdikis, general manager of Koons of Silver Spring, said he has seen the effect trickle into the auto market. Several customers in recent weeks have cited the low rates as a motivating factor. At the end of last week, the average interest rate for a new-auto loan was 5.36 percent, down from 5.49 percent a month ago, according to research firm HSH Associates.

"Consumers realize that if they're going to make a purchase, now is probably the best time to do it," he said.

Greg McBride, senior financial analyst for Bankrate.com, said he thinks interest rates will remain low as investors continue to shun risky assets.

"Eventually the downgrade will catch up with Uncle Sam, and consumers and businesses will also pay higher rates," McBride said. "But for now, the weak economy remains front and center."

Still, the freefall in the stock market and uncertainty over the economic recovery has weighed down overall demand. Stan Humphries, chief economist for home appraisal site Zillow, said the blow to consumer confidence will outweigh any short-term benefit from low interest rates.

"In periods of economic turmoil, many consumers tend to hunker down, making it less likely they will engage in high-priced transactions like home purchases," he wrote in a blog post.