Mortgage Market Update

As expected, the Federal Reserve agreed on a new round of quantitative easing (QE3). What wasn’t expected however, was the methods and the length of time that this round of QE will last.  Fed Chairman Ben Bernake announced the newest QE program this week and it caused a great stir in the stock market.

What’s different?

This round of quantitative easing will involve purchasing $40 million dollars worth of bonds this month and each month going forward. There are two significant differences with this round of QE and prior rounds. First, rather than purchasing treasury bonds, the purchases will be all Mortgage Backed Securities (MBS) and there is no end stated as to when the last purchase will take place.

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Why no time limit?

The best reason for no time limit on this round of buying is fairly simple. The Fed feels that these bond purchases will help stimulate the economy in two ways:

  • Higher home prices – Buy purchasing MBS instead of treasury bonds, the Fed believes that this will help ease the crunch with home prices. This is because the purchases help instill a measure of confidence in the mortgage market. Higher home values lead to more confident consumers, encouraging them to spend money.
  • Overall stimulus – The Fed believes that new funds need to be injected into the economy to help create jobs and stimulate financial markets. While the Dow has closed to its highest level since December of 2007,  there is still an overall perception that banks are not lending.  By helping to ease fears of even lower home values, more banks may begin lending, homeowner’s may begin spending and hence, jobs should begin to increase. This caused the markets to climb on Friday.

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Impact on mortgage rates

One of the best things about this round of stimulus offered by the Fed is that home mortgage rates should remain low.  In fact, rates ticked slightly lower after this announcement, driving them down even more than they have been over the last several months. Mortgage rates did unexpectedly rise on Friday.

Consumers are feeling more confident about spending, in fact latest tracking polls show that consumer sentiment is up to its highest levels since May. The price of gasoline continues to be a problem for many consumers, especially given that oil is now up to $99 per barrel, again at it’s highest rate since May.  Inflation remains low at .6 for August of 2012, showing an adjusted annual average of 1.9 percent with the biggest increases in energy and food costs.  The October numbers should reflect whether or not QE3 has any impact on these numbers.

 

Disclaimer: This blog is for informational purposes only. The weekly mortgage market update is our opinion and should not be used in making a mortgage rate lock decision. NMLS #849597

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