"ALL GOOD THINGS MUST COME TO AN END..." Or so the popular saying goes. And last week, the Fed reiterated once again that their Mortgage Backed Security (MBS) purchase program...the program that has helped keep home loan rates low for much of the last year...will end on March 31, 2010 as previously stated. Here's the lowdown on what this means, and all the latest news impacting home loan rates and the markets.
Last Wednesday during their regularly scheduled meeting of the Federal Open Market Committee, the Federal Reserve kept the Fed Funds Rate unchanged. But history has shown that when the Fed has left rates too low for an extended period of time, there is a price to be paid, via higher inflation. Yet if the accommodation is removed too early, it can derail an already fragile recovery. The Fed continues to walk this tightrope, trying to get it "just right."
Along with this decision, the Fed emphasized and reminded that their MBS purchase program will still end on their already revised deadline date of March 31, 2010. Why is this significant? Let's look at the numbers from last week to get an idea. The Fed purchased $16B in MBS in the latest week bringing the year-to-date total to $1.087T. This means there is $163B left to purchase before March 31, which in turn means the Fed will purchase about $11.5B on average each week through the end of the buying program. This is less than half of what the Fed was buying regularly throughout 2009 and a 1/3 less than what the Fed has been buying in recent weeks.
So why does this point to higher rates around the corner? When there is lots of supply and diminishing demand, the price of that item will subsequently go down - it's Economics 101. So, when Bond prices start to decrease from the diminishing demand of the Fed's purchases, home loan rates will naturally be likely to increase. Give me a call if you want to see how you can benefit from the current low rate environment...before it becomes too late.
In other news, there was mixed inflation data last week, as the Producer Price Index (which measures wholesale inflation) came in significantly higher than expected. However, the Consumer Price Index was reported in line with expectations, signaling that inflation remains low - at least for now. Inflation will ultimately creep back into the economy - and as the arch-enemy of Bonds and MBS - will also contribute to rising interest rates.
Housing Starts for November were in line with estimates and, as you can see in the chart below, the housing sector seems to have stabilized after bottoming out at 458,000 Housing Starts in April.
Chart: Housing Starts
Meanwhile Building Permits, which are a leading indicator of housing construction, reached the highest level seen in the past year. This is encouraging, and the extension of the Home Buyer Tax Credit should provide an added boost for home sales over the next few months.
Bonds and rates were able to improve in the middle of the week and as a result, Bonds and rates ended the week about where they began.
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