The Federal Reserve meets, keeps rates low, but makes a statement that could have a BIG impact on Real Estate.

The Federal Open Market Committee (the policy arm of the Federal Reserve) adjourned their two-day meeting on Wednesday.  It wasn’t so much what they did as what they said.

The FOMC said it would continue to keep The Federal Funds Rate – an overnight interest rate banks use when lending money to one another – near zero for an “extended period,” but mentioned the economy has “continued to strengthen” and recovery would be “moderate for a time” (a rosier outlook than in previous statements).

These statements, while somewhat generic, do have an impact on Real Estate and lending.  However it was one reaffirmation in particular that could have a HUGE impact on the housing industry.

But first, a quick primer on the Fed…

FED 101
The aim of the Federal Reserve in it’s interest rate policy is to either speed up or slow down the economy.  In times of economic downturn, the Federal Reserve will cut rates to help create a boost.  Conversely, in times of heavy inflation the Fed will raise rates to help slow down the economy.  That’s it; speed up or slow down….no tricks.

When the credit crisis begin to spiral in 2007, what did the Fed do?  They cut rates – sometimes dramatically so – in hopes of jump-starting the economy.

The Fed keeping rates near zero is an indication – oddly enough – that the economy is moving along at a steady pace.  If the economy blows up and inflation starts to creep in, watch for the Fed to begin hiking rates.

While keeping rates near zero wasn’t a surprise to anybody, there was one statement that made Realtors and lenders across the country very nervous…

THE MONEY STOPS
By March the Federal Reserve will have spent $1.25 trillion dollars purchasing Mortgage Backed Securities (MBS) in hopes of artificially lowering mortgage rates, and resuscitating a deflated housing market.  The plan worked beautifully, and is the main reason we’ve experienced historically low mortgage rates since late 2008.

However, in their statement today the Fed reaffirmed their plan to stop buying MBS on March 31st.  There is a consensus that mortgage rates will jump after the program’s completion, although the extent of that “jump” is up for debate.  Some analysts say the increase will only be 0.50% at most, while others offer dire warnings of rates spiking to mid-6% levels and an ensuing dramatic slow down in the housing market.

Either way, the low mortgage rates we’re seeing now will come to an end.  The effect on the housing market remains to be seen, but for potential and current homeowners now is the time to act if you’re looking to purchase or refinance.  If you’re not currently working with a lender and you’d like to dive into your current scenario and see what’s available, jump over to the contact page and drop me a line.

For more information on the Fed’s MBS purchase program and it’s effect on Real Estate and lending, check out this article from The Washington Post; it’s a great read.

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Nick Mallory is an active loan officer in Portland, Oregon.  Have any questions or comments about this post?  Visit the contact page and drop Nick a line.