What happens when the FED stops spending $ on mortgages?
What happens when the FED stops investing tons of money on mortgage backed securities? The spending spree begun over a year ago now and the ship appears to be losing steam. As part of the gigantic stimulus package intended to jump start our economy and markets, the spending on mortgage backed securities was intended to artificially influence mortgage rates to be lower. This would happen naturally with the increased demand on the market the FED’s spending has created. This impacts grounds zero for our economic meltdown, the housing market. The low rates have increased the buying power for the buyer’s of 2009. As we begin 2010, the pressures are on the market to sustain the gains in the market while the reality is that 2010 buyer’s are faced with a more limited buying power due to new guidelines.
What will happen as we move away from the historically low interest rates we’ve seen for months? In addition to the debt to income restrictions that have been implemented in the last month to increase the strength of borrower on conventional loans, increased interest rates will erode buying power. In some of the hardest hit markets, like many in California, the demand in some “bargain” neighborhoods has outpaced the supply leading to multiple offer scenarios. As the buyers lose their buying power, I would hope that the strongest buyers continue to support the market gains, as so much of our countries wealth depends on this thing called “equity” …a term that seemed to be the buzzword a few short years ago.
Regardless of the outcome, there will come a day when the FED decides they can not continue their spending and when that day comes, I guarantee interest rates will be affected (unless an act of congress freezes them…highly unlikely!) As soon as the FED is no longer the major player in the market the private investors will be in control and they will likely compensate the loss in demand with an increase in premium to attract more investors (= higher rates.)
Although I don’t have a crystal ball to tell us how and when things will happen, it’s always a good idea, in any market, to be familiar with everything you are financially invested in and like a game of chess, anticipate your next few moves. At the end of the day nobody cares more about your finances than YOU! Keep an “always learning” attitude and you will be better of than most of the population.
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