MORTGAGE INTEREST RATES TO RISE? Fed Says "No!' - for the Time Being!
DESPITE SIGNS OF IMPROVING ECONOMY, FED TO KEEP RATES "EXCEPTIONALLY LOW"!
The U.S. Economy is improving, despite a 26-year high in the U.S Unemployment Rate. Interest Rates are low - less than 5% for some borrowers. President Obama today extended the popular First Time Homebuyers Credit well into 2010, and extended to program to include many existing homebuyers as well.
But inflation is low. The Real Estate Market is still sluggish, here in Chicago, and across the U.S. And the Fed, it seems, is not planning to upset the apple cart by raising rates at this time, as reported in the Wall Street Journal yesterday by reporter Jon Hilsenrath.
The reason the Fed would eventually increase their key Federal Funds Rate - the rate at which banks lend to each other overnight - would be to curb inflation. However, at this point, inflation has not taken a foothold, despite an economic recovery in some sectors.
Currently, the Fed Funds Rate is close to zero, and many mortgage interest rates tied to it - especially rates on Adjustable Rate Mortgages and Home Equity Lines of Credit - have seen significant declines over the past year.
Alternatively, it is possible that keeping interest rates so low for an extended period, coupled with a heavy pumping of Federal Funds into the U.S. Financial System, could eventually create inflationary pressure in and of itself.
At last week's meeting of the Federal Reserve Board, the Fed elected to purchase $175 Billion in Corporate Debt issued by U.S. Mortgage Investors and Guarantors Fannie Mae and Freddie Mac. Their original plan was to buy $200 Billion of such debt.
To date, the Fed has completed its early 2009 plan to purchase $300 Billion of securities from the U.S. Treasury. It plans to complete purchase of roughly $1.25 Trillion in Mortgage-Backed Securities by next March. These moves are designed to put more money in the U.S. Financial System, and encourage lending by big banks.
Is the plan achieving the Fed's desired outcome. Some experts feel - not yet!
But low interest rates for mortgage loans, despite what seems to be ever-tightening standards for home financing - have helped spur home purchases by qualified borrowers, although not to the extent those in the real estate industry would like to see.
DEAN MOSS & DEAN'S TEAM CHICAGO
