Yesterday, the Federal Reserve announced confirmation of its plans to stop buying mortgage-backed securities (MBS) at the end of this month. That may sound technical and uninteresting, but most economists expect the move to spell the end of the current period during which Americans have enjoyed some of the lowest mortgage rates for half a century.
According to Freddie Mac, the monthly average commitment rate on 30-year, fixed-rate mortgage loans hasn't risen above 5.42 percent since December 2008. The very lowest mortgage rates of the period were seen in April 2009, when the monthly average for this type of loan was 4.81 percent. Just last month, it averaged 4.99 percent.
Mortgage loans and the Fed
Back in November 2008, when the credit crunch was at its worst, the Fed instituted a program under which it would buy $1.25 trillion worth of MBS. At the time, private investors were spooked by the unfolding scandal of subprime lending, and were unwilling to provide the funds to back new mortgage loans, at least at rates that were remotely affordable. So the government had to choose between an even more severe collapse of the housing market than was already occurring, and a stabilizing intervention with public money.
It was always intended that the Fed's MBS program would end on March 31, but some observers had expected it to be extended. In the wake of yesterday's announcement, it now seems near certain that today's mortgage rates, which remain close to record lows, will begin to rise in the next few months.
How soon will rates climb?
Many analysts previously thought that the Fed's withdrawal from the mortgage market would result in considerably higher rates very soon thereafter. But many now expect a far less dramatic rise.
One analyst opined to the Miami Herald today that a rate increase "...is inevitable. But maybe they'll rise gradually instead of jumping." However, Ian Shepherdson, the chief United States economist at High Frequency Economics (an economic forecasting company) remains far less sanguine, as quoted in yesterday's New York Times. He thinks the Fed ceasing MBS purchases will "expose M2 [a key measure of the money supply] to the full force of the credit contraction, and it won't be pretty."
Still, Mr. Shepherdson wrote in a research note, "The Fed reserves the right to buy assets again if needed," adding the caveat: "We think it will have to."
Lowest mortgage rates and you
However quickly rises occur, it seems quite possible that today's mortgage rates will be the the best available, perhaps for decades to come. So if you're thinking of buying a home, and particularly if you're considering refinancing, the time to act may be now. Compare mortgage rates here.