Question: We have been hearing that mortgage rates will go up after March 31st because the Federal Reserve will stop buying mortgage bonds. Is this true? How does that work? We are trying to buy a house this spring and we are worried that we may not be able to afford it if mortgage rates increase a lot.
Answer: There is a risk that mortgage interest rates will increase substantially this year, but no one really knows when that will happen or how much rates may rise.
The reason many mortgage experts are predicting an increase in mortgage rates is because, as you stated in your question, the Federal Reserve plans to stop purchasing mortgage-backed securities at the end of this month. Over the last year, the Fed has been buying billions of dollars’ worth of mortgages every month, pumping up the market.
The mortgage-securities market works just like the stock market. When there is high demand for a stock, that stock’s price rises. And when there is high demand for mortgage coupons, their prices rise. Interest rates move in the opposite direction of mortgage securities prices, so when prices go up, mortgage rates fall — and when prices drop, rates increase.
Since the Fed has created an artificial demand for the coupons by purchasing huge quantities every month, that has kept prices high and mortgage rates have remained in the 4.75 to 5.25 percent range for the past year. Mortgage analysts fear that once the Fed ends its purchase program at the end of this month, prices will fall, causing mortgage interest rates to rise.
On the other hand, the country is still in a serious recession and the Federal Reserve has indicated that it has no intention of raising bank interest rates anytime soon.
Low interest rates help spur business investment and consumer spending to get the economy moving, so traditionally rates remain low during a recession. Some experts think that will help keep mortgage rates down for at least the next few months, even after the Fed’s purchase program ends.
Most people don’t have access to the mortgage market quotes unless they pay for a subscription to a financial service, but you can get a rough idea of which way the market is moving by following the bond market, specifically the 10-year Treasury note. You can get free bond market quotes from online finance sites as well as on Google, Yahoo, etc.
Keep in mind that the bond market and the mortgage securities market usually move in the same direction, but not always. And remember that just like the stock market, when you hear news or read that the bond market is up that’s a good thing. It means that interest rates are moving down. If the bond market is down, that means rates are heading up.
It’s virtually impossible to predict mortgage interest rate movements with any degree of accuracy more than a couple of days in advance, so we won’t really know what kind of effect the end of the Fed’s purchase program will have on mortgage rates until after it has happened.
The good news for homebuyers is that even if mortgage rates increase slightly, home prices have fallen back to 2005 levels, and in some areas they are continuing to fall, so homes are more affordable now than at any time in the last five years.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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