Posts Tagged ‘quantitative easing’

Economic Uncertainty and Mortgage Rates

January 17, 2017

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How does economic uncertainty impact mortgage rates? I’m glad you asked!

In general, when the economic outlook is good, investment dollars go into stocks. As money goes into stocks, there is less money available to go into bonds. This flow of money causes stock values to rise, and bond prices to fall. As mortgage backed security bonds (or MBS Bonds) values fall, interest rates rise.

Some recent recent examples:

  • Brexit Vote: when the UK voted to leave the EU, that sent shockwaves through the world financial markets. Stock markets around the world pulled back, and bond prices went up. Mortgage rates improved until…
  • US Presidential Vote: Mortgage rates soared as stocks soared after Trump was elected president of the United States. Seems stocks felt Trump’s election would be a boon for business in the US. Stocks flirted with all-time highs day after day once Trump won the election. With this much money going into stocks, bond prices dropped, and mortgage rates increased by over a full point (from low 3’s to mid 4’s) in the weeks following the election.
  • US Presidential Inauguration: as the nation gets ready for the 45th President of the United States, there are signs the honeymoon period is over. A recent article said Trump would have the lowest approval rating of any President at inauguration. The gains in stocks have slowed, and there is growing concern about the “trade war” rhetoric. Maybe a trade war works out in the long run, but the short run in hurts business, hurts investments, and can cause a recession. With these thoughts in mind, we’ve seen stocks pull back over the past couple of weeks, and mortgage rate have improved.

What does the future hold? For those wanting to see lower rates, economic uncertainty is a main contributor to rates improving. It is no coincidence that all-time lows in mortgage rates occurred during the Great Recession. It is also no coincidence that mortgage rates haven’t dramatically improved since the economic recovery from the Great Recession has been slow and painful for many. And there in-lies a great dilemma… the quickest way for mortgage rates to improve (outside of Governmental influence such as Quantitative Easing) is from economic hardship. While low rates are great, in the long run, a sluggish economy isn’t great either.

Looking to buy or refinance a home? If refinancing, sitting and waiting isn’t a bad idea. I am currently watching rate for several clients in hopes they continue to drop. Once we hit our target rate, we get started. If buying, this is trickier as you can’t sit and wait for a long time on rates when there is a closing date involved! This is where our FREE one time rate float down comes in handy. Ask me about it! If the home is in the state of Georgia, contact me. We can get started today on your loan.

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QE3 is officially over

November 3, 2014

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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.

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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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Interest rates still ignoring impact of tapering

May 13, 2014

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Here we are roughly 6 months into the Federal Reserve’s Tapering program, and interest rates have yet to skyrocket as most analysts (and this blog) expected. Not only are interest rates not higher, but rates are lower today than they were at the start of the year. The Federal Reserve has been a major purchaser of mortgage backed security bonds (MBS bonds) for years, yet their slow drawback out of the market is having virtually no real impact thus far. Why?

A previous post on this blog detailed some of the reasons behind this. World events that can destabilize economies, poor economic numbers, and poor economic outlooks all impact MBS bonds in a positive way. MBS bond prices go up, rates go down.

Another impact is the amount of MBS bonds available for purchase. The first quarter of 2014 saw the fewest number of loan originations in roughly two decades. Fewer closings means fewer MBS bonds available to buy. Even with the Federal Reserve reducing the amount of MBS bonds they are buying, the Feds are actually purchasing a larger percentage of the market than they were during the height of their Quantitative Easing program. With less money made available, the Federal Reserve is still the largest buyer in the MBS bond market.

Instead of rising, interest rates have improved with a combination of world events, poorer economic outlooks in developing economies, and the Federal Reserve’s continued use of Quantitative Easing. At some point, the Quantitative Easing will come to an end. The Federal Reserve will be out of the market, and rates will rise. In fact, it might be good to see some rise in rates as it could signify economic growth. Until it happens, let the good times roll with the lower rates!

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Tapering impacting interest rates

January 29, 2014

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Yesterday, The Mortgage Blog focused on the Federal Reserve’s QE3 Tapering strategy. Today, let’s discuss how Tapering could impact the interest rate market.

Most analysts felt interest rates would rise as the Federal Reserve exited the bond buying business. A funny thing has happened so far in 2014… the market has slightly improved over the course of the month. This can be partly attributed to the Federal Reserve’s decision to not exit the bond market in one fell swoop. It is also because of current economic news in the world.

With the release of some stuttering US economic news, along with other key global economies showing signs of slowing down(China), these factors are leading to a global selloff of stocks in all of the world’s markets. All of the sudden, US Bonds are being viewed as a safe haven. Foreign investors are buying bonds at a faster rate than the Federal Reserve is exiting the market.

The Federal Reserve’s exit plan, so far, was well thought out and enacted at the right time. Interest rates have not increased, and bond markets are stable. What does this mean for those looking for a new mortgage?

The prevailing theory is interest rates would climb into the upper 4’s. Instead, rates have stayed in the low to mid 4’s. Use this opportunity to still take advantage of historically low interest rates. Whether buying a new home or refinancing an existing one, now is the time to get started. If the property is in the state of Georgia, I can help get the process underway.

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QE3 Tapering Continues

January 28, 2014

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The first Federal Reserve meeting of 2014 is the last time Ben Bernanke will be the chairman of the reserve. Should we expect any surprises from the  meeting?

Probably not. As unstable as the market has been over the last several months, the last thing anyone wants is a surprise as Bernanke exits stage left. One thing that is on everyone’s mind is the tapering of QE3.

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Please sir, I want some more QE3?

As discussed on this blog, the Federal Reserve is bringing its current Quantitative Easing plan (called QE3) to an end, but there is still more of it to go around before it is gone for good.

The Federal Reserve wants to end QE3, but end it without causing a panic in the markets (unlike May/June 2013). The Tapering plan goes something like this:

  •  the Feds will slowly reduce the amount of bonds they purchase each month. January 2014 marked the first month of tapering.
  • the Feds will reduce the amount of bonds it buys every Fed meeting until they have completely exited the market.

Expect the tapering plan to continue with another $10 billion reduction in bond buying by the Federal Reserve.

What will be a consequence of the reduced bond buying? More on that tomorrow…

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QE3 Tapering begins in 2014

December 19, 2013

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The Federal Reserve announced Wednesday afternoon that the “tapering” process will begin in January 2014. Apparently there will not be a QE4-ever after all!

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The Federal Reserve has purchased bonds for several years now, and as much as $85 billion worth of US Bonds each month since September 2012. The process was called Quantitative Easing or QE as it is commonly known. QE was a two step process the Feds used to help stimulate the economy.

  • Step 1 – by 2008, the Federal Reserve dropped the Federal Funding Rate to near zero. This was to encourage short term borrowing to stimulate the economy. The lowering of the Federal Funding Rate is a common tool used by the Federal Reserve during a recession.
  • Step 2 – due to the severity of the financial crisis, the Federal Reserve began purchasing US Treasury and Mortgage Backed Security Bonds to lower long term lending to help stimulate the housing market along with the auto industry. This strategy was the QE, which turned into QE2, and QE3. The QE’s were partly responsible for the historically low interest rates the country has grown accustomed to seeing. Without QE, interest rates would have never got as low as they did over the past few years.

Instead of having a hard end to the QE program, the Federal Reserve will taper-out of QE. In January, the bond purchasing will reduce from $85 billion per month to $75 billion. The amount purchased each month moving forward will be reviewed at each Federal Reserve meeting and QE will eventually come to an end in a year or two.

By slowing reducing the amount of bonds being purchased, the Federal Reserve hopes the interest rate market has a slow and steady climb on interest rates instead of a volatile and rapidly rising rate market. In theory, historically low interest rates should still be available in the coming year, but rates won’t be as low as they were in 2012 and early 2013.

If you are looking to refinance or purchase a home, how should you respond to this?

I’ve spoken with several clients this year who decided to wait for interest rates to get lower. With the rapid rise in rates starting in early May, some people felt interest rates would eventually fall. With the announcement of tapering, we won’t see interest rates get as low as they have been in the past few years.

The goal now should be to look to get into your new home OR start that refinance process today while rates are still low. To get started, contact me. If the property is in the state of Georgia, I can help you through the loan process.

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QE4-ever?

October 1, 2013

blog-author-clayjeffreys3

Quantitative Easing (or QE) is the government’s unconventional plan to help stabilize the financial markets and the economy. This program began in late 2008 and is ongoing today. It helped push interest rates to historic lows, stabilize the financial markets, and also helped to fuel the stock market. So what exactly is QE?

Basically, it is the government buying. As the government purchased bonds, it helped stabilize and increase the value of those bonds. By doing so, it caused interest rates drop (to help housing market) and allowed the financial markets to “take a breath” instead of panicking about the current state of events.

The first round was announced in late November 2008. On the announcement, interest rates dropped half of a point. Interest rates continued to improve from there. Prior to the recession, the government held roughly $700 million of Treasury notes. Through QE1, QE2, and QE3, their balance sheet got as high as $2.1 Trillion (with a “T”). The goal was to buy bonds to stabilize everything, then slowly sell them off to get back to pre-recession levels. It hasn’t worked out that way.

QE1 gave way to QE2… then we had QE3. Then the goal was to stop QE3 by the end of 2013 or early 2014. The plan to begin taper off bond buying was announced in mid June. Note the use of the word “taper” and not “stop immediately.” How did the market react?

Remember the sudden interest rate spike in June? Well, when this “taper” plan was announced, bond prices dropped drastically. When bond prices drop, interest rates go up. Stocks dropped almost 700 points during the same time period… that is how the market reacted. By the Federal Reserve meeting in mid September, the tapering of bond buying was put on hold with no new end date announced. Stocks and bonds both improved (which is why rates got better in September).

What now? In theory, bond buying can’t go on forever. The market will eventually have to stand on its own. As you can infer from this post, the market can react emotionally at times. If you are thinking of buying a home OR wanting to refinance and think you missed out, a new window has been opened as interest rates improved with the continuation of QE3 (or should it be 4 now?!?).

How long will this window last? With the way bond buying has gone since 2008 (almost 5 years now), maybe forever… or maybe as short as the next Federal Reserve meeting in late October. Those meetings impact the markets. We have less than 30 days until the next meeting. Don’t miss this opportunity and avoid market uncertainty by starting the loan process now. I can help you start the loan process today if the home is located in GA.

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