Freddie Mac’s weekly survey of residential mortgage rates hit a new all-time low, at 4.19% for a thirty year fixed-rate mortgage.

With the consumer price index running at about 1%, the real (nominal rate minus the inflation rate) interest rate is around 3%.  Which is still positive.  For now.  Real interest rates turn negative during inflationary times.  But the CPI is not the best measure of inflation during periods of stagnant or declining demand that are coupled with expansionary monetary policies.

Commodities markets do a much better job of measuring inflation, and they’ve lately been screaming higher, particularly agricultural commodities, which is telling.  There have been no great supply shocks in agriculture to push prices higher because of lower supply.  Minor supply disruptions due to weather extremes, like the Russian heat wave, are anticipated and priced in.  There has been no great increase in food demand.  A half billion aliens with hungry mouths did not just migrate to earth.  The population remains relatively stable, still slightly growing, but not so much nor so fast to fuel a massive increase in demand for agricultural commodities.

It’s the money, Ben.  And Ben just gave a speech today in Boston saying that he’d be cranking up the presses some more, in light of his view of reality that,

“At current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight” and the “risk of deflation is higher than desirable,” Bernanke said. “High unemployment is currently forecast to persist for some time.” (from Bloomberg News)

There is a prescription to cure high unemployment.  It’s called lower wages.  That’s what we’ll get, no matter what Ben does.  Ben understands this.  His route to lower wages is through higher inflation, leaving wage rates to stagnate.  It’s psychologically easier on workers to accept a pay cut in the form of higher inflation than it is to actually see their wages cut, but the reality is the same.  Then they get to be angry at some evil central banker that supposedly controls the economic levers of the world, but in fact only controls, like the wizard behind the curtain, its illusions, the most important of which is the illusion of their control of real economic outcomes.

Housing is suffering the same fate as labor.  It is vastly oversupplied, and so prices must decline.  But the mechanism is somewhat different.  With housing, nominal purchase prices will remain more or less stable (like wage rates) while the price of money used for purchase effectively declines to zero, or even below zero, in real terms.  Ben understands this, too.  That’s why he’s trying to push long rates down, or will be, when he starts buying Treasuries again, this time at the long end of the yield curve.  He wants long rates to nominally go as low as possible, and real rates to go negative.  Which will help keep nominal housing prices from much outright decline, while their effective price declines with the interest rates.  Buying a house with a mortgage will be cheaper, even if the price paid for the house isn’t.

It’s not clear, however, what effect the foreclosure mess will have on the housing market.  If it operates to impair the securitization process too much, housing prices might just experience another round of significant (>30%) declines.  Then things might get interesting.  Again.