When buying a home one very important component of the decision making process for most people is the mortgage rate. Lower rates mean you can afford more house for your money. As rates increase, typically home buyers must scale back their expectations and settle for less size and/or amenities in their home. Some home buyers are shut out of the market altogether as rates continue to rise.
We haven’t had to worry about mortgage rates limiting, or eliminating potential home buyers for quite a while. But the reason rates have been low during 2009 may be cause for concern next year.
About a year ago the Federal Reserve announced it would begin to buy mortgage backed securities. At that time there seemed to be no other alternative if we wanted to avoid a serious collapse of the housing market. If you think what actually happened was bad, try to imagine the national real estate market in 2009 with interest rates on home loans at 8% or above. That would have been really ugly.
The original plan called for the Fed to buy $500 Billion in mortgage backed securities. Later that figure was expanded to $1.25 Trillion. Just for effect, here’s what that figure looks like fully expressed numerically.
$1,250,000,000,000.00
That’s a whole bunch of mortgage backed securities! As a matter of fact, the Fed purchased about 80% of all mortgage backed securities in 2009. That’s right… your government now owns most home mortgages. And the really scary part is they purchased all of this with printed money. They grew the deficit. The Fed probably owns your mortgage and they bought it with borrowed money… but that’s another story.
The purpose for this drastic move was of course to attempt to bring stability to an already shaken housing market. As the Fed buys mortgage backed securities, the price of those investment products go up. As the price of mortgage backed securities go up, the street prices on home loans go down. Simple macro economics 101, right?
Well, maybe it’s simple and maybe it’s not. My question is what happens when the Fed stops this program? They stated that they wanted to end it by March 2010. Since Jan 2009 the Fed has averaged about $19 Billion each week in purchases of mortgage backed securities. It peaked at $25 Billion per week in May and seems to have tapered to about $14 Billion in November.
Here’s a few questions to ponder. Is our economy and national housing market strong enough to withstand the effects of stopping this program? Will the Fed pull the plug, or ramp things down? Will private investors step up to the plate and purchase the mortgage backed securities once the Fed walks away?
One thing seems clear to me. Interest rates on home mortgages will likely go up about mid 2010. About the time that real estate markets are at their seasonal peak. 2010 should be a very interesting year indeed.
