With Rates at Historic Lows, What’s Next?

By Russ Boyd on December 6th, 2009

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You already know that what the Federal Reserve does with interest rates has a huge impact on the housing market.   What you might not know is that the Fed influences housing prices in another significant way—through its purchasing of mortgage-backed securities (MBS)—and now the question is that when the Fed stops buying those securities in the near future, how will it affect the housing market?

That bank or broker then sells your loan to an entity that aggregates your loan with a bunch of other loans into a big “pool” of various types of loans with various maturity dates (fixed, adjustable rate, one-year, 30-year, good credit, bad credit, etc.) The aggregator then issues these pooled mortgages as bonds, the MBS, which promise investors an attractive stream of interest payments.

Who are these aggregators?They are government sponsored entities (GSEs). One large group is the Federal Home Loan Banks (FHLTo the rescue came the Fed. Last November, as part of its efforts to get the economy moving again, the Fed announced it would buy $500 billion in mortgage-backed securities. In March of this year it raised its target to $1.25 trillion, and it has followed through on its pledge.  These purchases have undoubtedly provided much needed liquidity to the MBS market and helped keep the long-term mortgage rates at historic lows.

O.K., let’s get back to the original question: What’s next? Well, just as it has been with interest rates, the Fed has been transparent about its intentions toward MBS. It has said it will stop buying MBS once it fulfills its commitment of buying those $1.25 trillion worth of bonds. It will complete that purchase sometime during the first quarter of next year.

That means that, sometime within the next five months, the Fed will be withdrawing a prop under the housing market.

What remains to be seen is how other investors react as the Fed slows—and then eliminates—its purchase program.

My expectation: As the Fed pulls out, private investors will demand a higher interest rate for such securities—to compensate for their concern people will continue to default on their mortgages—and thus long-term mortgage rates will rise. The real question is how fast and how high.

The real estate and mortgage markets are more complex than ever.  I encourage all interested buyers, sellers and homeowners to work with an agent that they can trust, an agent that values their business and an agent that has the skills and experience to provide counsel and guidance in this complex market.

If you are in the San Francisco Bay Area, I invite you to start at our Resource Center, www.AboutBayAreaHomes.com. There you will find links for active home listings, including bank owned and short sales, home loans, market activity reports, home seller strategies, staging and decorating,  a suite of 19 calculators, plus my book, “Let’s Make a Deal, The insiders Guide to Buying and Selling Real Estate” and more.  Of course I am always available to discuss your real estate or mortgage related questions or concerns, just call, text or email me for a prompt response.

Russ Boyd and his team professionally assist buyers, sellers and homeowners in the Peninsula Communities of the San Francisco Bay Area. They serve clients in San Mateo, San Francisco, Santa Clara, Alameda and Contra Costa counties. Licensed as a Real Estate Broker by the California Department of Real Estate, 01264240.