QE3 is officially over

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blog-author-clayjeffreys3

As promised, the Federal Reserve ended their Quantitative Easing (also called QE) program last week. This wasn’t unexpected. Toward the end of 2013, the Feds announced they would begin tapering off their purchasing of bonds, which included mortgage backed security bonds (or MBS bonds). The Feds had several objectives in buying bonds, and one of them was to help push interest rates lower. They achieved that goal by purchasing MBS bonds. As the value and demand of MBS bonds increases, interest rates decrease.

The purpose of tapering was to prevent a financial market that was accustomed to the Feds purchasing bonds from freaking out by its sudden withdrawal. A practical example – the Feds were acting as though they were introducing a fish to a new aquarium. You keep the fish in the bag of water it was placed in at the pet store, and let the fish float in the bag of water in the new aquarium to get adjusted to the water temperature of its new home. If you don’t do this prior to releasing the fish, the shock could kill it.

goldfish-bag

With the Feds officially out of the bond buying business, one of the instruments that helped interest rates reach historic lows is gone. Will interest rates rise? Most analysts thought rates would in 2014, but rates are a little lower now than they were in January 2014. That said, rates aren’t far off their historic lows from a couple years ago – meaning, rates have much more room to get worse than to get better.

One important point to clarify in the Feds statement. The Fed’s plan is to continue to keep short term lending rates near zero for the foreseeable future. Short term lending rates and interest rates are not the same thing. The short term lending refers to the Federal Funding Rate. Interest rates are determined by the value of MBS bonds, which change daily just like the stock prices of Apple, Google, UPS, etc. The Feds are no longer trying to influence MBS bonds now that QE3 is over.

What does this mean for those looking to buy a home? The simple answer is, we don’t know. Interest rates could stay the same or begin to get worse. Instead of knowing the Feds are in the background helping to keep MBS bond prices high, their values are now dependent solely on market factors.

If you are looking to buy a home or refinance, look to get started soon. Everyone has expected interest rates to rise the past few years, and they haven’t yet. Still, as I said earlier in this post, interest rates have a lot more room to get worse than to get better. If you are looking to buy in Georgia, contact me to get started.

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