In the past few weeks, mortgage rates have seen a sudden spike. They have gone from historical lows in the 3% range to 5% and above. The obviously puts a strain on the affordability of a home. Even though the current rates are still historically low, they seem high in comparison to more recent experience.
The recent spike in rates was a result of Fed Chairman Ben Bernake announcing that the Federal Reserve was going to start slowing down its purchasing of bonds through its Quantitative Easing program. But there may be hope for aspiring homeowners. Bloomberg reports,
“When Federal Reserve policy makers start to curb $85 billion in monthly bond buying, possibly before the end of the year, the last thing they want to do is spoil the nascent U.S. housing recovery.
That means the Fed may concentrate first on trimming purchases of Treasuries, while continuing to buy mortgage bonds to keep a lid on interest rates for home loans.
‘There is a valid case to slow down Treasury purchases before MBS purchases,’ said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former economist for the Fed’s division of monetary affairs. ‘The recent sharp increase in mortgage rates poses a threat to the housing recovery, and a continued housing recovery is necessary if the economy is to stay on a more robust trajectory.’
Policy makers led by Fed Chairman Ben S. Bernanke have said in the last two months that the central bank’s mortgage-backed securities program has helped the economy, with Boston Fed President Eric Rosengren urging reduction first in Treasury buying and San Francisco Fed’s John Williams saying mortgage buying was ‘more powerful.’
Minutes of the Federal Open Market Committee’s June 18-19 meeting, released yesterday, showed about half of the 19 participants wanted to halt bond purchases by year end. At the same time, the minutes showed many Fed officials wanted to see more signs employment is improving before backing a slowing in the pace of the purchases, known as quantitative easing. Bernanke said in a speech hours later that the U.S. economy needs ‘highly accommodative monetary policy for the foreseeable future.’”
If the Fed continues to purchase mortgage bonds, this will help keep mortgage interest rates at their historical lows and allow the housing market to continue its recovery.