30-year fixed rates have dropped like a rock since late July:

ARM rates, while less rock-like, have also fallen steadily for over a month:

This bond-market exuberance can be ascribed to the fact that the Federal Reserve ended their long tightening campaign in early August. But can it last? Both the bond market and the Fed are banking on the idea that an economic slowdown will cause inflation—which is still rather high—to subside. However, many people (myself included) question whether things will play out that way.

Since the pause, and despite the questionable logic thereof, the Fed heads have been making the rounds to jawbone about their inflation-fighting credentials. Is it just more talk? You never know with these guys.

One thing I do take seriously, unlike Fed doublespeak, is the fact that Conference Board survey respondents expect a 5.5% rise in inflation over the next year. I believe that the Fed is much more concerned with inflation expectations than with actual inflation. If this is indeed the case, then that Conference Board number may portend of another hike if it doesn’t start falling posthaste.

For what it’s worth, Barry at The Big Picture (one of my favorite financial blogs) believes that the bond rally is looking long in the tooth.

As for how this all affects San Diego housing, I don’t think it’s very significant. Most San Diegans in recent years have used ARMs, and while ARM rates may be lower today than they were a month ago, they are still far higher than they were in 2004 and 2005. So while monthly-payment affordability may have gotten a recent shot in the arm (due to both lower rates and lower home prices), the mortgage reset problem is still with us.