Food for Thought - Federal Reserve News of the Day
Anytime there is a meeting of the Federal Reserve and the Chairman provides his outlook on the economy and the Fed’s action, there is frenzy in the media, the stock market fluctuates, and the housing market quivers.This week is no different.While the majority of consumers and media entities are focused on interest rates, I suggest there are much bigger issues than interest rates.Here’s some food for thought:
As I watched the morning news, Joe Kernen of CNBC’s Squawk Box said regarding the Fed’s quantitative easing (QE) program, “The quicker you get off the drugs, the faster you can clean up your life,” metaphorically relating the market on QE to a drug addict. Currently the Fed purchases $85 billion per month in mortgage backed securities through the QE program.
Chairman Bernanke indicated today that Fed is likely to begin reducing the amount of MBS and Treasury securities it is buying each month beginning later this year, and may halt these purchases by the middle of next year.The market was anticipating this move to an extent, but rates still rose following his discussion. The Fed is moving in reaction to a growing economy.At some point this extraordinary stimulus needs to be taken away so that we do not risk overheating and inflation.
The Fed will eventually have to exit the market and stop purchasing mortgage backed securities.It’s a matter of when, not a matter of if.We need a thoughtful “detox” program that eases the Fed out of the MBS market and allows private capital back in.
So, what about the interest rates?A Washington Post headline reads, “Rising mortgage rates elicit fears they could hurt housing recovery.”While a Wall Street Journal headline reads, “Mortgage Rates Rise but Still a Bargain.”
Interest rates for a thirty year, fixed rate mortgage have risen to just above 4 percent, and should stay there for the rest of the year.Will refinancing slow down even further?Yes, we are seeing a burnout in the refinance market.Everybody who can refi already has at 3.5 percent, so there is no incentive to refi at 4. But the larger point is that this slight increase in interest rates will not prevent people from purchasing homes.This is not what will hold back the housing recovery.Tight credit standards and availability of homes are holding back the market.
Single family starts are expected to increase gradually through 2013 as home prices continue to improve and the inventory of homes for sale remain tight. Single family starts should total around 640,000 for 2013 and increase further to 700,000 starts in 2014.Existing home sales increased 0.6 percent in April to a pace of 4.97 million units for the year, and are almost 10 percent higher than a year ago. The pace of sales is the strongest since November 2009, which was elevated at the time by incentives from the home buyer tax credit program.
Now, there is a tipping point when it comes to interest rates.Obviously, lower rates are good for home sales, but a marginal uptick really doesn’t make that big a difference on buying power or qualifying power.What we don’t want to see is rates gradually getting closer to the 7% or 8% they were 10 years ago.
The Fed needs to end its purchase of MBS, but do it carefully. Pulling the rug out from under mortgage rates too quickly could really spook the market.
(Photo credit: Albert H. Teich / Shutterstock.com)
Private Equity, Startup Investor, Corporate Leadership
11 年The reality is that unless the government stops killing the private sector with regulations and environmental rules that only apply here, but not in Asia and other nations, we will slowly become a 3rd world economy and nations where private business is helped, not hindered, housing will die as no one will qualify.
Techno Wizard - Jack of All Trades, and Master of More Than a Few.
11 年I think that most people are forgetting a very critical fact. The reason that the economy tanked in the first place was that we had a round of massive debt deflation. The Fed was attempting to stabilize an economy about to go hyperbolic on housing so they raised rates. This is what they are supposed to do. The problem was that the global economy's rate of change had become so highly leveraged that stepping on the brakes ended up sending everything in reverse rather just slowing things down as it was supposed to. Traditional methods of stabilizing markets had utterly failed in part do to the dissolving of the "Chinese Walls" between the banks and their investment arms. That is not to say that stepping on the brakes wasn't the right thing to do. In today's modern global economy there are only periods of growth/inflation or decline/deflation. It is a continuous balancing act of the second order derivative of the economies growth. People tend to forget that some periods of decline are actually healthy for an economy. Just as wildfires can help eliminate underbrush that chokes the growth of the forest, so too does deflation help expose fraud and corrupt business practices. Now the next order of business is simply that the economy needs to contract but in a healthier fashion. If we don't ease our way out of it the markets will collapse again. But if any of you have studied technical trading, you might realize that the markets are probably due for a correction to the downside. I haven't been following things closely lately, but I would suggest a correction of the Dow to lose about 4000 points or so over the next few years is not unlikely. It has to do with the fact that we have an aging population that is beginning to spend its retirement investments rather than continuing to pour money in to the large mutual funds that make up the bulk of the financial markets. Rental properties will probably be okay, because most older individuals won't want to watch their money evaporate again. But single family home starts will or should begin to decline as more individuals retire. Otherwise the market will begin to have a glut of excess starter homes and prices will need to fall to compensate. Hopefully the markets won't go down in a straight line again, but they probably need to start coming down for positive real growth to occur. As interest rates rise, expect the bond markets to start ticking up and the stock markets to start to decline. I know it sounds kind of convoluted and callous, but it is a natural part of the universe that growth must be impeded or it becomes cancerous.
Amie - call your lender -
Looking to start a career on the New Home Construction/Community Development side of Real Estate
11 年Ok I am new to all this and just getting into residential real estate. At the same time my husband and I are having a home built and it will not be ready to close till the end of October. We were quoted 3.5% max 3.75% at the top when we went over all the numbers inMay. What does this mean for us. We built a home based on the finacial qualification at the time. We were $60 off our max mortgage payment. We are paying out of pocket for the little extras we want. And didn't even spend the entire builders allowence. I will not make money for months. I am freaked out and scared that because of the intetest rate our solid financing and qualifing is now going to go down the toilet. Theres not enough we can do to downgrade the home were building. And its already started. What should we do? We can't lock anything in right now. Should we just bail and get something now with a much lower intrest rate? Maybe I am panicing for nothing, but advice would help.
I gotta say - I love the comments. Don't hold back!