So, last week, the Fed made their big announcement of the quarter that sent bonds off to the races and made the markets generally happy. The major news outlets began reporting that mortgage rates will go to 4% or less, and of course they are wrong........as usual. J I'll explain more about what is happening here, and why.
Yesterday, the FHFA (Federal Housing Finance Agency) reported that US home prices rose 1.7% in January as compared to December. This was the first monthly increase in a year. Next week, well see the Case-Shiller index report for January. The FHFA tracks home sales on a national level using data from Fannie Mae & Freddie Mac. Case-Shiller takes a much more region by region approach. Hopefully, the Cash-Shiller report will support the data in the FHFA report.
So.....back to the Fed. Will rates get down to (or below) 4%? Probably not...and here's why. OK, so you know that I am not a pessimist, just a realist. Here's the reality of what is happening with the Fed rate stimulus plan. As they announced last week, they are going to purchase $1.25 trillion in mortgage bonds. So far, they have been buying plenty, on a regular basis. Primarily, they have been buying 4.5% and 5.0% coupons. What does this mean? Well mortgage rates are tied to specific bonds, or coupons. A 4.5% coupon relates to a 5.5 or 6.0% mortgage rate. This is because the coupon price is the base price of the money (interest rate) before all of the different entities (banks, institutional investors like Goldman or Merrill, agencies like Fannie Mae, ect) build in their profit margins. So, to get a 4% interest rate to the consumer, the coupons being bought by the Fed will need to be 3% coupons, or less.
So, why isn't the Fed buying these lower rate coupons? Well, because they want to get their money back. ? ? ? Well think about it, what's happening to 6% interest rate mortgages right now......they're being paid off (paid back) at a pretty rapid pace, through refinances. So, the Fed is dumping $$ into the system to stimulate the economy but they are also making sure that they get their investment/profit back fairly quickly. So, although the media is pushing the sub-4% interest rate story, it's unlikely that we'll get there. Hopefully, having this info will help you get some people "off the fence" and take advantage of this amazing home buying/investing opportunity.
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