Today...the Federal Reserve exits the train station and ends their 15 month long buying spree of mortgage backed securities (MBS). This purchase program helped bring some stability to the housing market since its inception in January 2009.
Looking back to late 2008, mortgage rates were in the 6.5% range and housing was on a fast downward spiral. The government wanted to bring rates lower to stimulate housing, thus making it cheaper to buy or refinance homes. In order to bring rates down, there has to be an appetite for buying MBS. At that time very few investors were buying MBS, so the government stepped in as a buyer.
The Fed's entrance into the MBS market accomplished two things. First, their massive purchases drove yields higher and rates lower. Second, they brought some confidence into the market for other potential investors. How? Well, a purchasing investor has confidence he has a seller (the Fed) in case he wants to make a fast exit. It lowered the risk of getting stuck holding the bag...or bond in this case.
The result was exactly as the Fed hoped...rates moved lower. While there were periods of upward trends and intra-day volatility, mortgage rates have remained historically low. As we wrap up today, the Fed has purchased $1.25 trillion in MBS since the beginning of this program.
The Fed began unwinding there purchase program back in the fall of 2009. Originally scheduled to exit the program at the end of 2009, the Fed extended the exit date to today, March 31, 2010. They did not increase their dollar commitment, just extended the deadline. Purchases of MBS have declined from around $30 billion/week to lately about $5-$6 billion/week.
What happens after today? Where will rates go? As the Fed gravy-train pulls out of the station, it leaves a void in the market which will push interest rates higher. Think about it...less buyers means prices move lower. Lower prices on bonds mean higher interest rates for home buyers.
Another dynamic I will be watching is the Fed changing their role from being a buyer to being a seller. This could add additional pressure to the bond market. Dallas Federal Reserve President, Richard Fisher said that "the Fed must sell back those Mortgage Bonds to the market, but it is not yet time to do so." There is growing sentiment among the voting members of the Fed to start trimming their balance sheet over time.
Remember, rates are historically low and although the trend will likely be higher...rates will still remain very attractive. That combined with deflated home values continue to make this a great time to be a home buyer!