What’s going on with rates part II
I never thought that we would continue to see low rates this far into 2009. How much longer will the rates stay low and when will we see the inevitable rise? Interest rates today have not been this low since the 1940s; we are truly living in historic times. One of the main reasons that interest rates will increase soon is because the federal government will stop purchasing mortgage-backed securities, a main driver of low interest rates, on March 31, 2010. Many economists have theorized that once the government stops purchasing mortgage-backed securities interest rates will increase by three quarters of a percent. What that means to most of you is that rates will go from 5% to around 5 3/4 or 6%. That would still be historically low rates compared to where we’ve been for the last 20 years. This increase will have a significant impact on housing affordability and could impact a still fragile housing market. Every time interest rates rise fewer customers have sufficient income to qualify for new loans.
With only a few more months to go before rates creep back up to 6% we could be seeing the end of low rates for quite some time. My assumptions are based on the increase in economic activity, specifically housing activity, and eventually job growth. The Federal Reserve met today and confirmed that the mortgage-backed securities purchase program will end March 31, 2010 and that they are not anticipating extending this program passed the date. In addition they announced that Fed fund rates will remain low for an extended period of time because of recent economic indicators that point to signs the economy is improving.
I hope everyone has a happy and safe holiday season.