Mortgage Rates Rise After Fed Hints at End to QE3 In 2013
Home loan rates moved up to their worst levels since mid-August after the Fed hints at stopping the QE3 purchase program by the end of 2013. The QE3 purchase program currently allows the Fed to purchase $40 billion per month in an effort to keep rates low. While many Fed members still feel that the QE3 bond buying is a necessary evil, others feel that accumulating another $1 trillion over the next year (yes, Trillion, with a T) may not be warranted since the economy is showing signs of improvement. After release of the news, mortgage rates were crushed, causing home loan rates to increase by nearly .25% in less than 24 hours.
How Does an End to Quantitative Easing (QE3) Affect Mortgage Interest Rates?
While the QE spending has likely helped keep interest rates at or near historic lows, the Fed comments about ending QE3 quickly provided a glimpse into how much the Fed’s purchase programs are influencing the market. The Fed released minutes of their FOMC meeting and hinted at an end to the QE3 Bond buying at some point in 2013. The markets immediately took this as a sign that interest rates should be higher since the Fed would no longer be purchasing $40 Billion per month in securities that would artificially sustain low rates for home buyers. Without the Fed providing the massive purchasing power of Mortgage Backed Securities to keep rates low, a normalcy will come back to the market, leaving interest rates at a higher, more sustainable level.
- Higher mortgage interest rates – Fed will no longer be purchasing bonds to keep prices high and rates/yields low
- Lowers liquidity in the markets – less money printed and available to purchase bonds = less bond buying overall
- Increase in volatility – Mortgage rates more likely to be affected by global and U.S. economic reports
QE3 is old news – Will QE4 Help Keep Interest Rates Low?
QE4 was announced in early December ’12 as another monetary stimulus package. The QE4 purchase program is very similar to QE1, 2, and 3 as an attempt to stimulate the economy through a targeted Bond buying program. The QE4 plan adds an additional $45 Billion in Bond purchases to the $40 billion already in place from QE3. The difference is the Bonds that are targeted by each QE stimulus package.
- QE3 is aimed to target the purchase of $40 Billion in Mortgage Backed Securities (the bonds that directly influence home mortgage rates)
- QE4 on the other hand is aimed at the purchase of $45 Billion in long term treasury notes
While QE4 will help keep long-term Bond prices and yields low, QE4 does not directly impact home mortgage rates.
Where are Interest Rates Headed Moving Forward?
The Fed views a recovery in the real estate market as one of the greatest opportunities to turn-around the economy. An increase in real estate volume and home prices would not only help people who have spent the last 10 years underwater (owing more than the home is worth), but also stimulates the many industries that benefit from real estate growth and expansion. The mortgage lenders, title companies, general contractors, home builders, home warranty companies, etc… all stand to benefit from a boost in the real estate markets. The Fed understands this and will continue to artificially influence home loan rates to make sure the real estate markets can continue to grow. However, people don’t buy houses, they buy payments. Rates alone do not drive someone to purchase a home, rather the price range that they’re looking to purchase a home.
In the next 12 months we do expect home loan rates to increase to a more “normal” and sustainable level. While interest rates aren’t expected to jump to 6% overnight, part of a real estate recovery will be paced with a steady increase in rates. The announcement of a potential end to QE3 in the calendar year may be the tip of the iceberg towards a trend of higher interest rates in months/years to come.
