If new mortgage applications are a reliable gauge of forthcoming home purchases, looks like we've got a bumper crop taking shape out there.

Last week the Mortgage Bankers Association's national survey registered a record 37 percent jump in applications for new conventional loans to buy houses, and a 39 percent increase for home purchases using FHA mortgages.

The reason for the sudden surge? A half point drop in 30 year fixed mortgage interest rates to 5.47 percent -- which was down from 6 percent the previous week -- and to just 5.13 percent for fifteen year loans.

The rate drop happened almost overnight, after the Federal Reserve announced plans to pump up the housing sector by buying $100 billion worth of bonds issued by Fannie Mae and Freddie Mac.

The Fed also said it plans to buy about half a trillion dollars of mortgage-backed securities issued by Fannie, Freddie and Ginnie Mae beginning this month. Ginnie backs the FHA side of the market, just as Fannie and Freddie do on the conventional side.

So why did the Fed's moves mean so much? Because mortgage rates have been higher than they should recently due to bond investors' uncertainty about the safety of Fannie and Freddie.

Both companies racked up multi-billion dollar losses last quarter, causing investors to demand extra-high premium returns before they'd buy Fannie or Freddie debt.

But now that's over. The government's backing of Fannie and Freddie is explicit and big. Investors are reassured. They'll take lower premiums, allowing consumers to get lower mortgage rates.

Although lenders report their phones were jammed with applications from people who want to refinance, the big surprise was the huge jump in applications from consumers who plan to buy houses.

With prices down in the majority of markets, more and more people are finding that the equation now works: Fixed rates in the mid-fives combined with pricing at 2003 and 2004 levels make a compelling case that this is an excellent time to buy - provided you've got a downpayment and reasonable credit.

The bright spot in housing finance came in a week that was otherwise pretty much an economic downer: More bad news on Wall Street; followed by the official designation that we're now in a recession.

One additional bright spot to report: Unsold inventory -- the backlog of houses that weighs down local markets -- dropped by a full point and is now down 4 and a half percent for the year.

That's a very positive sign and should only get better with lower mortgage rates.

Published: December 9, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.