Will the purchasing of 500 million in mortgage backed securities help the housing market? The Federal Reserve thinks so, hopes so, is probably praying so if anyone there leans that way.
The massive government intervention in the markets has not created any real results except to allow the politicians to say that things would have been much worse if they had not acted. I am not too sure about that, but if this is the case my bitching about the heat in Georgia probably stopped Global Warming dead in it’s tracks.
But lets not get sidetracked.
The Federal Reserve is planning on another huge intervention a day late and a dollar short, but that is always the way. What scares me is them publicly saying that the goal is to drive interest rates down to 4.5 percent.
Last week, the Federal Reserve announced that it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage rates immediately dropped, and that led to a surge in mortgage refinancing activity for the week — even with the Thanksgiving holiday.
On Wednesday, people close to the discussions said that the Treasury had been talking with Fannie Mae and Freddie Mac about ways to drive down mortgage rates to as low as 4.5 percent. That rate is about a percentage point lower than the going rates for such loans. via NYTimes.com
And here is my problem with this:
I fear the announcement of 4.5 percent interest rates will hurt home sales.
Why, because those on the fence to buy a home at the right time will wait on the fence for the rates to happen. Why buy a home with a mortgage of 5.5 or 6 percent, historically low rates as they are, if you can get in at 4.5 percent. So those on the sidelines will stay there.
That does not sell homes.
Another great voice in the wilderness, Thomas Vanderwell, had this to say on his blog Straight Talk About Mortgages:
So far, the market has shown that they would rather earn less (frankly close to zero) and invest in US Treasuries than they would invest in mortgage backed securities. Given the history of Fannie and Freddie recently (how many billions did they lose in the 3rd quarter?) I’m not sure anyone can blame them. Can you?
So if investors are avoiding Mortgage backed securities like the plague, and there are trillion of dollars of them out there, will the interaction by the Fed make a difference. And if no difference is made, how will we get 4.5% mortgage rates? And if we do not get these 4.5% mortgage rates that homeowners will now expect, how in the world are we going to sell homes to people waiting for cheap mortgages?
What a mess.
UPDATE: from a comment, the damage to home sales may have already started:
The final total could be much higher than $4 billion since this estimated figures is calculated to be about $4 billion per week* until this is resolved. via VA Mortgage Center
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Good point about people possibly holding off now. The 4.5 percent interest rate could be a self-fulfilling prophecy.
The only people holding off will be those that are financially secure and can manage to hold off. How many are there of them right now? Everyone is so desperate that even these historically low rates have doubled mortgage volumes independent of news of a further drop. This is good even if it doesn't come true, and even better if it does. Win/Win?
It seems there are numbers posted about how much it could cost the US in home sales from people holding out:
http://www.vamortgagecenter.com/blog/2008/12/04/4…
Guys the Fed doesn't have a clue. Our asset prices are going to fall a lot lower than we all think if we don't get inflation under control. "Stimulating sales" ought not be our focus right now. It doesn't matter if you can get a home at even a 2% mortgage…if values are falling, people are not going to buy. Interest rates should be in the double digits right now and climbing. Instead, we have everyone still trying to get the market back to "normal". What we need to be doing is NOT buying; we need to be saving money and paying off the ridiculous debt we've accumulated. After we've accumulated some wealth, we can reasonably get back to investing. We've got to get away from the idea of buying assets with no money. That's not real growth; it doesn't really help anyone. We need to stop spending and start building wealth.
I understand that these are uncertain times. I and several of my friends are just waiting on the fence for the 4.75 % rate. The salers are growing impatiant. I wish I knew when to jump off the fence.
I just signed my contract 4-21-09 and I received a mortgage rate at 4.5%. Everyone that I have talked to says that is a steal & that I must have really good credit, but I don't know for sure. I am just super glad to get such a great rate because it seems like no one gets 4.5%. I can not be happier, I would definately get off the fence now. I've done a ton of research & it seemed to me like now was the best time & apparently it was. I'm in Texas and used Omni American Bank.
I just locked in my rate with Provident Bank about 10 minutes ago. I got 4.5% with 1.0 origination point.
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