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First, the good news: Mortgage rates are at all-time lows. The bad news: The housing market is still severely depressed. This apparent conflict is real and, unfortunately, understandable. Let’s examine the good news first—and the reasons for it.

Should this trend continue?

The secondary market, as we know it, began in 1970 and 1971, with the creation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), respectively.

Along with creating consistent buyers for banks’ and mortgage lenders’ new loans, the birth of these organization also meant the start of meticulous records tracking national mortgage rates, new loan volume, and a variety of other important data.

Historic lows for mortgage rates

Mortgage rates in 2010 have achieved the new low levels since these detailed records have been kept. For those of us old enough to remember, the current rate levels are close to those that existed in the 1950s. The real estate and mortgage market was much different in that era.

After the dangerous, depressing, and stagnant years during World War II, the U.S. government and business community targeted a shifting in economic focus (from a wartime to a peacetime environment) and methods to stimulate both individuals and businesses.

Infusing the ability for average citizens to achieve home ownership was a primary component of this recovery. The government created the Veterans Administration (VA) to help service personnel, including a special mortgage lending program that exists today, featuring liberal underwriting rules and low interest rates.

Banks and savings-and-loan institutions were the primary sources of mortgage loans. With no secondary market, banks had to keep their mortgages in their loan portfolio.

While real estate prices were amazingly low (you could buy a house for $10,000 or even less), and mortgage rates were similar to today, banks favored 15-year loans and seldom offered options for more than 20-year terms. With jobs often paying $5,000 to $10,000 per year, borrowers faced the same relative challenges as most of us in the 21st century.

Tracking 21st century mortgage rates

The early 21st century featured low rates, many creative mortgage products, and rapidly increasing real-estate values. Unfortunately, many mortgage lenders became too creative, and sub-prime loans (for borrowers with less than good credit) took center stage in this rapidly increasing “hot” value market. This proved to be a lethal combination of factors, hurting the secondary market and the entire real-estate and mortgage industry. The only positive constant has been mortgage rates, both while the market was hot and since it has turned icy cold.

Here is a recent rate comparison to display this fact. These are relative rates for the years noted.

Although there were fluctuations during the year, rates remained quite consistent.

Product 2005 2006 2007 2008 2009 2010 Fixed 5.25% 6.25% 5.75% 6.25% 5.50% 4.50% 1-Yr ARM 3.75% 5.00% 5.25% 5.25% 4.75% 3.50%

Low rates, in the 6 to 7 percent range, helped fuel the real estate “feeding frenzy” of the early 2000s. Rates then further declined until the mortgage “bubble” burst (2007 and 2008), and the affordability continues today. Unfortunately, the depth of the recession and the magnitude of the real-estate collapse have prevented a strong recovery in the mortgage industry to date.

Low rates will not last forever

Because the secondary market rules the mortgage industry and competes with other long-term investment options (e.g., bonds), rates are more strongly influenced by the bond market than prime rate or any other typical indicator or index. Translated: As the bond market goes, so follow mortgage rates.

This does not eliminate free competition. Mortgage lenders seeking new volume (which applies to all of them in 2010) continue to attempt to showcase the best rates and terms to attract potential borrowers. However, all mortgage lenders, if they wish to remain profitable, must adhere to secondary market rules and pricing.

In 2010, there is heavy demand for bonds by the investment community. Also, after a few years of disfavor, mortgage-back securities, which compete directly with bonds, are once again becoming a prized investment product. This has helped keep national mortgage rates low and eminently affordable.

History advises us that these low mortgage rates will not last forever. They may last through the coming months, primarily because of the large inventory of short-sale and foreclosed properties still on the market.

Home buyers remain scarce, however. The lingering effects of the recession, not mortgage rates, are the primary problem. Until companies begin to re-hire and offer new jobs, the number of potential home buyers will remain low.

Combined with the disappearance of most of the sub-prime and creative mortgage products since the “crash”, this means that borrowers now need at least good credit and stable income to qualify for a mortgage. People without jobs simply cannot afford to buy—or even refinance their homes.