On September 13 2012, the Federal Reserve announced that it would launch another round of quantitative easing to try and boost the sluggish American economy.
Through this program, nicknamed QE3, the Federal Reserve will buy massive amounts of mortgage backed securities well into the future. How will this program affect the bond market and San Diego mortgage rates? Let’s take a look.
In order to stimulate the economy, the Federal Reserve is trying to keep interest rates low by buying up bonds. With QE3, the Federal Reserve announced it would buy 40 billion dollars of mortgage backed securities each month until it feels the economy has improved. The Fed has not announced an official end date to this program, but it is expected to continue well into the future.
The Fed will also continue making purchases through other programs. The Federal Reserve plans to buy an additional $25 billion of mortgage bonds through its portfolio roll off.
When you combine these two programs, it means the Fed is going to be buying $65 billion of mortgage bonds each month until some unknown point in the future.
On top of its mortgage bond purchases, the Fed announced other ways it would help stimulate the economy. It declared that it plans to keep interest rates low until mid 2015, 6 months longer than it originally planned.
The Fed will also continue its Operation Twist program, a bond swap program where the Fed sells off short-term bonds in its portfolio to buy up long-term 10 and 30 year securities. With all these actions, the Fed has become a major influence in the mortgage and bond markets.
Short-Term Effects on San Diego Interest Rates
The Federal Reserve’s announcement of QE3 had an immediate impact on the mortgage bond market and San Diego Mortgage Rates. QE3 was much more aggressive than the market expected which caused mortgage bonds prices to jump up.
As the Fed continues to buy up mortgage bonds each month, its purchases will give a boost to mortgage bond prices. This increased demand will also cause the interest rates on mortgage bonds to drop.
However, investors got a quick reminder that the Federal Reserve is not the only important player in the market for mortgage bonds. Soon after the Federal Reserve announcement, the Reuter’s/University of Michigan Consumer Sentiment index for September was released.
The Consumer Sentiment index exploded up to 79.2, crushing the expected forecast for the month. This new information started a sell-off in mortgage bonds causing the market to give up a sizable amount of the gains from the Fed’s purchases and interest rates to increase slightly.
Long-Term Effects on San Diego Interest Rates
As long as the Fed continues to buy up mortgage bonds each month, it will continue to push mortgage bond prices up and keep San Diego mortgage interest rates low. The expectation of low mortgage interest rates is hoped to inspire consumers to spend more and improve the economy.
QE3 has its problems though. One risk of the Fed’s increased spending is it could create higher inflation in the economy. This could offset some of the economic growth that the Fed is hoping for. Inflation has been relatively low over the past few months but it is something to watch out for in the near future.
Another problem with QE3 is it is causing a huge price disconnect between Treasury bonds and mortgage bonds. The Fed’s spending has pushed the interest rates on mortgage bonds far below the rates on Treasuries.
There is a risk that there will be a big drop in mortgage bonds prices sometime in the future as investors move into the higher yield Treasury bonds. San Diego Mortgage Brokers are already starting to observe this shift in the market, so be careful.
Advice for Borrower’s Seeking San Diego Mortgages
The Fed’s lengthy commitment to buying mortgage bonds is good news for home owners. QE3 will keep San Diego mortgage rates low for at least the immediate future. This gives homeowners more time to find the best deal for a San Diego purchase loan or a refinance.
However, it is advisable for homeowners not to wait too long before taking action. The Fed’s moves will help keep mortgage rates from going up, but they are unlikely to get much better.
Lenders that benefit from this program are unlikely to pass all their gains onto consumers so rates are likely going to stay around the current level. If you are considering a San Diego refinance, it’s hard to beat today’s attractive rates.
QE3 has created a great opportunity for current homeowner’s seeking a San Diego Refinance or prospective buyers who need a San Diego Purchase loan to lock in historically low rates.
If you would like to see how the Fed’s QE3 could affect your situation please feel free to give me a call or request a free mortgage rate quote. As a San Diego Mortgage Broker I have many options available to assist you.