Recently I’ve been hearing that many people are waiting to buy homes or refinance until the market stabilizes and interest rates drop further. Below are a few reasons why we don’t expect rates to get much lower.
Last week the Federal Reserve announced that it would invest 300 billion in long-term Treasuries and purchase an additional 750 billion of Mortgage Backed Securities (MBS). This infusion of additional funds is aimed at stimulating economic growth, stabilizing the housing market and keeping interest rates low. It also has the potential to eventually create more inflation.
Here’s how it works:
The Federal Reserve is buying Treasury Notes with maturities between 2 year and 10 years while also purchasing MBS. Both are efforts to keep interest rates low to stimulate our weak economy. In particular, the Fed wants to keep mortgage rates low in order to support nationwide demand for housing and provide an opportunity for existing homeowners to refinance, lower their monthly payments, and increase their spendable cash flow. Lower interest rate yields on Treasuries and MBS reduce borrowing costs for consumers and businesses.
What about mortgage rates?
Rates have come back down to where they were earlier in the year, but we don’t anticipate rates going much lower. Rates wouldn’t be as low as they already are without the huge amount of Federal money that is supporting the market.
Through the bail outs, stimulus packages and this recent announcement, the government continues to amass more debt. And, with that debt is the potential of inflation. In fact, this announcement saw Oil rise by $5 and Gold by $60 (Gold is often purchased as a hedge against inflation). If and when inflation becomes a factor it will quickly force interest rates higher. When the economy begins to stop its decline and move closer to coming out of this recession, the Fed will move to raise interest rates to try and moderate the inflationary push.
The best hedge for inflation is to fix as many costs at today’s prices as you can. A home purchase today with record low mortgage rate allows buyers to fix the price of the home and the associated financing costs.
Please contact me with any questions you may have.
Janice Reisman Fincher
400 So El Camino Real, Suite 200
San Mateo CA 94402