The Federal Reserve Bank announced yesterday its intentions to pump in an additional $1.25 Trillion dollars into the economy in an attempt to lower long term interest rates. This program will include $300 billion to purchase 10 year term Treasury securities, fund an additional $725 billion (in addition to a previusly announced $500 billion) to purchase mortgage backed securites issued fy Fannie Mae and Freddie Mac, as well as buying an additional $100 billion in Fannie Mae and Freddie Mac debt. The intent is to lower market interest rates for new mortgages and other long term interest rates.
In the short term, this strategy has proved to be effective in lowering mortgage rates, currently in the high 4% to low 5% range, for conforming mortgages (less than $417,000) purchased by Fannie Mae and Freddie Mac. It is expected that this additional impetus by the Federal Reserve may lower interest rates an additional 1/2 to 1/2%.
The major concern raised by this program is the potential effect this will have on future inflation. The Federal Reserve at this time seems to be more concerned with limiting the risk of deflation and a deeper recession. The Federal Reserve program is tantamount to simply printing money.Substantially increasing the money supply faster than the economy is growing would normally be highly inflationary.
I would advise anyone considering buying a home or refinancing their mortgage to do so as soon as possible. Historically low interest rates and substantially reduced prices make this an extraordinary time to buy a home.
I think that there is a high degree of risk of interest rates rising substantially over the next year. This is due to two reasons. As soon as the Federal Reserve Bank is no longer able to continue to pump such vast amounts of money into supplying capital to the mortgage markets, interest rates could rise substantially as the private sector is simply not investing in mortgage backed securities at this time. As capital dries up, interest rates could rise substantially. In addition, as the economy recovers, the huge increase in the money supply could lead to inflationary pressures and expectations, also significantly increasing long term interest rates.
I really believe that in 12 to 18 months, we will look back upon this time as one of the best times to have bought a home in our lifeetimes.