Last week, the Federal Reserve announced it would undertake a third round of quantitative easing, dubbed QE3. Quantitative easing is the Fed's practice of purchasing long-term financial debt, such as bonds and mortgage-backed securities. The objective is to bring down long-term interest rates to help the continuously ailing economy.
In a statement, the Fed said that without the action, "economic growth might not be strong enough to generate sustained improvement in labor market conditions."
The Federal Open Market Committee (FOMC) stressed its concern that the unemployment rate will not improve at a fast enough pace.
"If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the FOMC said.
That's a strong statement. It is telling the world that the Fed will keep using anything and everything in its bag of tricks to spark the economy and reduce unemployment.
Long-term interest rates, such as 30-year fixed-rate mortgages, are driven by market forces. If this is the case, how does quantitative easing cause mortgage rates to fall? Well, the Fed becomes a giant customer, creating demand. Whenever there is strong demand for a product, simple economics would suggest that the price will go up. Since the price and yield of long-term debt move in opposite directions, mortgage rates will, indeed, fall if the price of mortgage investments rise. This is the Fed's plan.
Does this mean potential refinancers should hold off? Or potential homebuyers should do the same? I certainly don't think so. Most economists agree there's no guarantee that QE3 will make mortgage rates fall further.
Remember, the Fed's efforts to drive down interest rates are only part of the reason rates are so low. One little improvement in the nasty European economic situation could send investors seeking the safe haven of U.S. Treasury bonds fleeing, driving rates up. Or if the giant Asian market loses its appetite for U.S. Treasuries, the same could happen.
I'm looking at one of my rate sheets as I write this, and I see that qualified borrowers can get a 30-year fixed rate with no points or origination charges as low as 3.50 percent and a 15-year fixed as low as 2.875 percent. That's pretty low. Stay tuned.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to email@example.com.