East money not so simple for homeowners
When it comes to money nothing is easy. It’s not easy to save it, it’s not easy to borrow it and sometimes it’s not even easy to spend it, unless you’re the Federal Reserve whose middle name is “easy-money.”
On Sept. 19, the long awaited report by the Federal Reserve came as a shock to the financial community driving the stock market up. Federal Reserve officials decided to keep their bond-buying program in place in an effort to continue to stimulate the country’s economy. The quantitative easing program is designed to promote hiring by holding down interest rates while encouraging individuals and businesses to spend money.
Even with short-term interest rates near zero the easy money policies of the Federal Reserve have not made the impact that was anticipated. In fact Ben Bernanke, the head of the Federal Reserve, indicated that the economic indicators are mixed with some job growth and better housing numbers but that we still have more pain ahead.
The same day the Federal Reserve announced their plan, the National Association of Realtors reported sales of existing single-family homes rose in August to an annual rate of 5.48 million units from 5.39 million units in July, higher than the expected 5.25 million units. This was the highest sales rate since 2007. As good as this sounds, existing home sales are still about 27 percent below the figures from mid-2005.
So what does this mean to mortgage interest rates that have been slowly climbing recently? Most people, even real estate and banking professionals, think that the Federal Reserve interest rate has a direct effect on mortgage rates. However, mortgage rates are based on mortgage bonds or mortgage backed securities and do not always follow a reduction in the Federal short-term interest rates which are designed to stimulate consumer spending. Short-term interest rates have an effect on credit card rates, car loans and lines of credit but generally not on long-term mortgage rates.
When short-term interest rates are lowered, or in this case not raised, investors see an opportunity to move from the safety of mortgage backed securities and take a risk in stocks. When this happens, the stock market rallies which happened when the Feds made their announcement, causing the mortgage backed securities to sell off, causing interest rates to go up. So looking for a dramatic reduction in mortgage rates based on the Federal Reserve’s easy money policies probably won’t happen immediately.
Nevertheless what the Federal Reserve does is not totally irrelevant to mortgage interest rates and frequently have a delayed and indirect impact on rates. Assuming this is true the Fed’s decision to leave interest rates low could also help to keep mortgage rates low. Remember that mortgage money is still a fabulous bargain with today’s fixed rate loans being less than in 40 of the past 42 years making buying property very attractive to both investors and homeowners. In mid-September the fixed rate was 4.57 percent which was more than a percentage point higher than in January but less than the average rate for all of 2010.
The economy is still struggling in many areas but real estate is chugging along. Without really knowing how mortgage interest rates are going to go it’s probably a good time to dive in now while there is still easy money available.