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Higher interest rates in the future

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Real Estate Agent with Better Homes & Gardens Real Estate Cal-BRE # 01734464

As expected, the Fed did not touch interest rates, but the statement was a market mover. The Fed said they are going to draw out the remaining commitment of Mortgage Backed Security purchases through the first quarter of 2010. There will be no additional buying, but instead, a longer weaning off of the program. This tells us a few things - there was some speculation about the Fed increasing the amount of buying above the $1.25T committed to, and yesterday's statement is a nice way of the Fed saying "no." They will not be buying more, but what they will do is attempt to provide a smoother transition to normal market conditions. It is a given that once the Fed ceases its purchases, that interest rates will climb significantly higher...most likely back above the 6% area. So instead of a hard transition with a large bump in rates, the Fed is attempting to allow rates to gradually rise.

So what does this mean for rates in the short term, and why did the Bond market rally on this news? The rally was more than likely due to the headlines from the media which said that the program was "extended". The markets reacted positively by thinking that the program would stay in place as is for three more months, which would have included more Fed buying. But the gradual reduction in purchases has to bring us to higher rates. The Fed has been buying about $25B per week, but the new plan to drag out these purchases over a longer period of time, means that they will be reducing both the frequency and amounts of their purchases. This will cause higher levels of volatility, as the Fed will be purchasing less often and less consistently. So we will see a gradual rise in rates over time. While we won't be seeing a sudden jerk higher in rates when the Fed buying program comes to an end, it is clear that rates are now going to be on a gradual rise...and waiting to purchase or refinance will mean a higher interest rate.

Doug's Take: This is from a daily update i get about market reports.  Basically what it's saying is that rates are LOW right now and are going to be higher in the near future.  When the Bond Market goes up, mortgage interest rates go down.  Just wanted to give you a heads up if you are considering a home purchase in the near future, interest rates is something to factor into the decision.  I've got excellent loan officers available to answer more detailed questions about rates and where they are headed.

clear skies,

doug

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