As some of you have heard, the Federal Reserve is buying up 10 year notes and mortgage backed securities at record levels. What does this mean? Much lower mortgage interest rates. Will this be good? Many think so, but I don't see it helping. I'll explain in a few.
Here is what Bloomberg reported in an article that they wrote.
"The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds."
Here is part of my problem.... Bloomberg again said... "bringing down the borrowing costs across the economy".... I guess that is one way of putting it. To me, borrowing costs would be monies to actually buy the home. Sure, lower interest rates lower your payments. But....
....... but, aren't you just going to buy a larger house, because you have a good idea of what you want your payment to be? Jeff, you tell me what I can buy if I want my payment to be around $2,000 a month. I tell you that you can get a house priced around $250,000 with taxes and homeowners insurance. Well, if rates dropped 1/2 percent, two things could happen.
- Your payment would drop $76 a month or
- You could buy a home for $265,000 with the same payment of $2,000.
In all honesty, which do you think the average person is going to do? In my opinion, probably buy the higher priced home. So Jeff, what are you trying to say. Well, the gov't is spending billions and trillions of dollars just to get the rates down. They want lower rates to jump start the economy, to buy homes. They basically want to get consumer confidence pointed in a positive direction. But what about jobs? Savings? Losing money in the stock market?
On another side of things, yes, it would allow people to refinance, to save money monthly. But wait, you mean you didn't refinance at 5.0%, even though it made sense and you would have recouped your costs in 3 1/2 years. So what is going to make you refinance at 4.5% or even at 4.0%? Oh, many of you had trouble even refinancing period, because either your credit scores were too low or because you didn't have enough equity in your home to do so. Interesting.... so how can you take advantage of the lower rates? Hope & pray??? Sounds like it's the theme for 2009 set by our own President Obama. Hope... Hope... and hope..
Summary : If you can buy and or refinance, don't wait hope that rates will come down even more. Just because the Feds have stated that they have a plan to keep buying, so it would lower the interest rates. This could backfire on you. In my opinion, rates will go back up and when they do, they will sky rocket. Don't believe me? Read this post by Matt Heaton. The next big asset bubble It will happen, just when will it happen is the question. Do you want to take that risk?
On another note, buying these notes and MBS's will hurt us for many years to come. This is just another band aide and once it's ripped off, I believe the ripple affect to more problems and issues will be bad. Why can't we just spend this money in other areas? How about giving each person $250,000 a piece. I believe that would jump start the economy. I know my spending habits then would help. What about you?
Food for thought.... how can you boost consumer confidence when job confidence is very low right now and that we have 8.1 percent unemployment. Lower rates isn't going to make this better, yet we don't seem to be trying to fix the unemployment issues. Sure, it might help a tad, but it won't solve our problems. And in my opinion, this will just have our kids kids pay for this, the printing of billions of dollars.
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Jeff, This move by the Fed scares me a little. The very real risk of inflation could erase more than just new mortgage savings. Rich
Hi Jeff,
Hearing this from an expert like you, confirms what I believe too!
The inflation risk is just about guaranteed. The unemloyment rate keeps going up. I don't see how confidence can return until both of these issues are cured.
Jeff,
i have been wanting to blog about this but i was hesitant about bringing in my politics on my profession. i completley agree that current fiscal policy is useless and will in the long term actually end up costing us more. i for one dont believe Obama is ignorant to this, i believe its part of his plan. he wants inflation to create a new crisis so he can step in and say that only government can fix it and we need government price controls and blah blah blah. i only hope a majority of americans can wake up and read the writing on the wall.
JP Lowry--President--Preferred Financial Funding
Jeff: Thanks for the reality check. I agree with you. We were joking yesterday in my office about the homeowners who are waiting until rates get under 4. The reason we joked is we knew they will never pull the trigger. You are correct about the American psyche. Until that is repaired, it's going to be a slow go. Even though alot of us are having a good year so far, it will be interesting to see how the second half plays out. I still think the economy has some bad news (think commercial lending) that hasn't been addressed. Take care.
I honestly don't understand economics and finance. I am probably one of the idiots who would go with a lower house payment than buy more house. (But I have also owned my modest home for 20 years, and didn't "move up" when the market was hot on purpose.) Lower interest rates will help some get off the fence. And I think that the general public keeps screaming for government to do something, and do it fast. Which is what they seem to be doing, but slow and steady may be a better approach.
The press harping on these "lower rate" is making my phone ring more, but you are so right that this is perception, not reality.
Rates got no lower than they did back in January, and they have already moved back up a bit. They have been "range bound" since the Fed started this buying spree, so it's logical to think rates will stay low but not drop more, at least as long as the Feds keep buying MBS.
As you say, our big concern is what the long term price of this is going to be. Inflation will be ugly when it hits, and rates will be forced up. This will likely start just as we are feeling the recovery, and can serve to prolong the pain instead. Let's just hope we are wrong Jeff...
Gerry Suarez, Jr.
Your FHA Loan Pro!
RICHARD..... . I agree 110% and it scares me some because of what ever Ben Bernanke has stated and what the FEDs are trying to do. I wrote about it in this blog post :
I would like to interview Mr. Bernanke because I am scared!!!
He has been against inflation, but now talks about lowering rates and keeping them low. Since I have written this post, pricing for rates have gone up about 3/4 of a point. That's $750 on more on a $100,000 loan. This adds up and I just think the gov't is wasting money on the mortgage backed securities.
CYNTHIA.... . well, that's good to know that a few of us believe this. What I hate the most is hearing the crap and misleading advertisements from other loan officers and lenders, stating that rates will go lower. Just because the gov't said so... but not caring how much money this will cost us in the long run. What for? A few more purchases and refinances?
MICHAEL..... . I agree with both of your statements. I can't see how confidence can come back. Most of all, how these politicians think that spending billions of dollars on mortgages will change things around. It's sad and scary.
JP.... . and yes, that scares me even more because of what Obama might want and the average American doesn't see it. And that is socialism and that scares the heck out of me. Are we that stupid to allow for inflation, as you stated, to see the gov't step in and control things. Not that they are already doing this. In order for more Americans to read the writing on the wall, we need to talk about it more and write about it more. That is one of the beautiful things about blogging... so chop to it. ;o)
PAUL..... . and they still aren't pulling the trigger and it ticks me off. They are just throwing money out the window. We need to write more about this. Just as I stated in my comment to Richard, rates are still low, but it's costing more this week than it did when they spent billions to lower rates. But we can't sustain these low rates unless we spent billions per day. And then we would go bankrupt, not that we are probably heading in that direction anyhow. thanks
CAROL.... . first off, I think the slow and steady approach is better. Especially if we just allow the market to correct itself. I would bet if the gov't didn't advertise that they are lowering trying to lower rates, that housing numbers wouldn't be off by much even now. It's in the consumers head, it's just a rate, not a payment.
In your case, you aren't one of the idiots for buying more if rates went down. You take the lower payment, which gives you a better savings approach. That was part of my point to this blog and you actually do understand it. You get an 'A' for the day. ;o)
GERRY..... . yuk, perception.... so many aren't living the reality that they need to, all because of the media and the gov't. I truly believe it's up to you and I to try to get people to understand this. By blogging, we can make a slight difference.
You made this statement....
"As you say, our big concern is what the long term price of this is going to be. Inflation will be ugly when it hits, and rates will be forced up. This will likely start just as we are feeling the recovery, and can serve to prolong the pain instead."
Wow, the part that I underlined could be right on. And no, I don't think we are wrong, that I think this will happen. As I have stated over and over, we can't sustain these low rates any longer. So where would they go? Just up... how high? I don't see double digits as some see, but in the 8's.... thanks