The Commerce Department reported this week that housing starts fell 22.5% in February to 479,000 units, from an upwardly revised January figure of 618,000 units. It was the biggest decline in 27 years and finished just above a record low set in April 2009. Building permits — a hint of future construction demand — fell to a record low of 517,000 units in February, compared to a revised 563,000 units in January. The levels in February 2010 were 20% higher than last year’s figures, Commerce reported.

U.S. mortgage rates fell to the lowest level in almost two months, according to a Bloomberg article. The average rate for a 30-year fixed-rate loan was 4.76% this week – down from 4.88% last week, based on data from Freddie Mac. After staying at 4.15% the past two weeks, the rate for a 15-year fixed-rate mortgage was 3.97%, according to the Bloomberg article. Experts believe the lower interest rates — a reaction to the crisis in Japan — will spur more refinancing.

Bloomberg also reported that mortgage applications fell the week ending March 11. According to the Mortgage Bankers Association, mortgage applications dropped 0.7%. The purchase application index declined 4% last week from two weeks ago, but the refinancing gauge was up 0.9%, Bloomberg reported. Look for the refinance index to increase, thanks to lower interest rates.

The New York Times reported that more people are turning to adjustable-rate mortgages (ARMs) as lenders are providing more conservative ARM products by eliminating “teaser” rates that adjust every six months, or the “pick-a-pay” and “option” features that allow borrowers to pay less than the monthly interest, only to be socked with a huge bill later on. The most popular ARMs are the 5/1 ARMs and 7/1 ARMs, in which the initial interest rate is fixed for the first five or seven years — after which many homeowners consider selling or refinancing their home — then adjusted annually at a capped rate toward a maximum level. The NYT article said the cost savings compared to a 30-year fixed-rate loan are significant. For example, someone borrowing $500,000 with a 5/1 ARM at 3.5% would save $42,507 over the first five years, compared to a fixed-rate loan of 5.25%. A 7/1 ARM at 4.125% would save $38,330 over the first seven years.