Is QE2 going to lower mortgage interest rates? Is it large enough to counteract all the other negatives for the housing market?
As the year began the 10 year treasury bond yield were expected to reach 4.5% this year by experts from private investment banks and government think boxes. It is what one would expect during the recovery.
Come spring 2010 rates barely kissed 4% and then sank back down. They actually rose to a high of 2.96% after the Fed November 3rd announcement that it would be buying $600 billion in the bond market. Bondholders sold as the Federal Reserve bought! Whoops. Rates were supposed to go down in order to discourage investors from buying low risk bonds. Mr Bernanke wants them to put their money into riskier assets like the mortgage market and business loans. We are two weeks into the QE2 bond buying program, so it is early to make judgement. Now Treasury rates have settled down , while interest rates on standard 30-year fixed mortgage rates have gone up to 4.62%! Whoops! This wasn’t supposed to happen. We can't be sure which way rates will go at this point. It seems there is a lot more room for interest rates to rise than there is for them to fall. Would a quarter point or even a half point be enough to effect someone's decision to buy or not to buy?
Mortgage Applications fall by a third from April of this year - the last month to apply for the home buyers tax credit. Successful purchase transactions will fall in the months ahead as FICO credit scores are being raised across the board.
FHA and all the major lending banks are tightening qualification standards on the loans they originate or purchase from smaller banks. The three largest largest mortgage originators, Wells Fargo, Bank of America, and JP Morgan Chase, no longer buy loans with FICO scores below 640 from other lenders. Many independent mortgage banks will follow suite. Only about 3.7 percent of U.S. consumers with credit information available, for a total of 6.3 million folks, score between 620 and 640, according to FICO. The Minneapolis-based company Fair Isaac Corp generates these nationally accepted credit ratings.
Nationwide about a third of sellers whose homes are still on the market have dropped their asking price at least one time. In Seattle 50% of sellers have done the deed. You can see the chart for all major cities here.
Nationally home prices are down 2.8 %. Seattle prices down 5.8 from a year ago.
Inflation is not what the Federal Reserve thinks will encourage growth. It registers an underwhelming .6% annual rise if you exclude food and energy prices, and 1.2% if you include them. So if investors expect inflation to lift prices, that is where they will put their money. Watch the prices of raw assets, basically anything you can take out of the ground, soak up all those Federal dollars. Eventually they will creep into manufactured products. But will they lift home prices in the face of all the pressures on the housing market now?
Bernanke said the Fed’s first large-scale bond-buying plan, from December 2008 through March 2010, was “quite successful in helping to stabilize the economy
and support the recovery during that period.”
The Federal Reserve will be adding to a trillion dollar reserve account by buying $600 billion more, plus money redemptions from those pesky mortgage securities the Fed took off the hands of our big banks last year. It is a lot to ask – but I for one will be holding my breath until the QE2 experiment ends this spring.
In the meantime, feel free to contact me with real estate questions.
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