Fed’s moves will have great impact on mortgage rates
Mortgage Backed Securities (MBS), the driving force of mortgage rates, hit their highest levels of the year on Friday. As the price of MBS increases, yield decreases, so it was a good week for rates.
The future is very cloudy, however. A main factor in mortgage rates remaining low has been the Federal Reserve purchases of MBS. By spending $1.25 Trillion, the Fed has created demand and kept rates artificially low. The plan has been to end these purchases in March, removing the ceiling on rates. Last week Fed Chairman, Ben Bernanke indicated that they may extend the purchases. However, other Fed officials have indicated the need to pull back and allow the market to return to normal.
How this unwinds will be critical to mortgage rates and the housing recovery. The Fed has created an artificial environment and if it stops “cold turkey” very negative repercussions are likely. This would include steadily increasing rates, making homes less affordable. However, the government cannot continue to prop up the housing market. Natural forces have to be able to work if we hope to get back to a free market system.
The Fed will likely reduce MBS purchases slowly; easing back rather than pulling out. This will allow the most opportunity for the market to stabilize and wean off of government funding.
Expect volatility as the Fed hints at the plan and investors interpret the news.
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Trulia
IMHO – we will see interest rates inch up over the next quarter because of investor jitters that these historically low rates can’t last…no matter what the Fed does.
A scary proposition is the possibility that the predicted commercial loan crisis is worse than expected – and banks being just as unable or unwilling to address the problem before it becomes a guillotine…leading to larger troubles in the credit market at large.
My strategy? Get your loan while you can take advantage of cheap financing rates – it won’t last forever (and you’ll love how smart you look this time next year!). When money’s cheap, property’s cheap & there’s $6000 to $8000 in tax credit money out there, its the “Real Estate Trifecta.”