March 26 (Bloomberg) -- The U.S. 30-year fixed mortgage rate fell to 4.85 percent, the lowest on record, on a government plan to increase purchases of mortgage-backed bonds and buy as much as $300 billion of Treasuries.

The average rate is the lowest in the Freddie Mac weekly survey dating to 1971, the McLean, Virginia-based mortgage buyer said today in a statement. The rate fell from 4.98 percent a week earlier, Freddie Mac said.

The Federal Reserve said March 18 it will purchase up to an additional $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae to support home lending. The Fed is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their price and lowering yields. That would allow banks to reduce the rates on new mortgages and still sell mortgage securities at a profit.

“The move by the Fed was especially aggressive,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. “We are starting to see tentative evidence that things are getting less bad.”

Sales of previously owned homes rose 5.1 percent to an annual rate of 4.72 million in February from 4.49 million in January, the National Association of Realtors said March 23. The median price slumped 15.5 percent from a year ago, the second- biggest drop on record, and distressed properties accounted for 45 percent of all sales.

Stabilizing Prices

Housing prices “aren’t that far from where we need to be if the economy stabilizes and starts growing again,” Susan Wachter, professor of real estate finance at the University of Pennsylvania’s Wharton School, said in a Bloomberg Radio interview on March 24.

The Fed announced a program in November to buy $500 billion of mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae. That helped drive 30-year fixed mortgage rates down to 4.96 percent for the week ended Jan. 15.

The 15-year rate averaged 4.58 percent, down from 4.61 a week earlier, Freddie Mac said.

Mortgage applications in the U.S. rose for a third consecutive week as a drop in borrowing costs helped spur a wave of refinancing and encouraged purchases.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan soared 32 percent to 1,159.4 in the week ended March 20 from 876.9 the prior week. The group’s refinancing gauge surged 42 percent and its purchase index gained 4.2 percent.

The average rate on a 30-year fixed-rate loan fell to 4.63 percent, the lowest level since the Mortgage Bankers group began records in 1990, from 4.89 percent the prior week. New home sales rose in February from a record low as plummeting prices and cheaper mortgage rates lured some buyers. Sales increased 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, the Commerce Department said yesterday in Washington. The median sales price fell 18 percent to $200,900.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: March 26, 2009 10:53 EDT