After this week’s FOMC minutes were released, big changes may be coming for the economy and real estate. Especially for mortgage rates…
Will The Federal Reserve Taper QE This Year?
Recently, mortgage rates shot up rapidly after their were several suggestions that the Fed would taper the current QE. The members of the Federal Open Market Committee (FOMC) said that they should start winding down the current quantitative easing program by the end of the year. Whether or not the Fed actually follows through and does start tapering QE remains to be seen.
You see the Fed is going to watch inflation, unemployment and many other economic signals before they do anything drastic. Such as reducing the current rate of QE. Not that this means mortgage rates won’t rise just because the Fed mentioned ending or cutting back on QE.
Right now, the Fed is buying $85 billion in Treasury securities and mortgage-backed securities (MBS) every month. I am scared that if the Fed cuts back on their QE purchases too soon or too fast, it will cause mortgage rates to spike again. As we just saw, just mentioning cutting back on QE caused mortgage rates to skyrocket.
Not Saying Yes Not Saying No
Again, the Fed did not say they are definitely going to cut back on QE. For now they are going to watch these factors before making any changes to QE:
- Labor market conditions
- Indicators of inflationary pressures
- Readings on financial developments
One good bit of news is that the Fed says they are not going to totally screw up the MBS market when they do cut back or stop QE. The Fed said it will not sell the boatload of MBS they have bought as soon as they stop QE. Demand for mortgage-backed securities is expected to fall if or when the Fed stops buying MBS as part of QE.
If the Fed started selling their MBS at the same time they stop QE, it would really put a hurting on MBS prices. Less demand equals lower prices, just basic economic stuff. And this is good since…
When MBS prices fall, mortgage rates rise.
No Change in Federal Funds Rate
The banks breathed a sigh of relief when the Fed said they will keep the Federal Funds rate at 0.000 to 0.250 percent “for a considerable time after the monthly asset purchases cease.” The Federal Reserve did not give a clear cut date for when they plan to start to winding down QE.
Another reason that the Fed is not doing anything about QE is because of the continuing economic problems in Europe. It is possible that if the crap hits the fan in Europe that our economy will also suffer.
The Fed did say that the economy showed moderate improvement since its last meeting. The bad news is that the national unemployment rate remains high at 7.60%. While this is not a big surprise to you or me, it takes a room full of morons in Washing to figure out that unemployment is still a big problem. High unemployment will probably mean the Fed won’t change its QE policy any time soon.
Fewer Home Owners Underwater
Another positive bit of news from the Fed was that fewer home owners are under water on their mortgages. Hopefully this should mean that more home owners are able to sell or refinance their homes. I hate to think that some people are going to miss the opportunity to buy while mortgage rates are at historically low levels.
The Take Away:
Listen folks, even though mortgage rates are higher than just a few months ago, they are still really really low. Home prices are increasing. The Dow and S&P closed at record highs after Bernanke said the Fed will continue QE.
So for now, home buying is still very attractive.
How much longer that remains true is hard to say.