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The Fed Announces It Will Buy a Half Trillion Dollars in Mortgage Bonds; Interest Rates Tumble
Whoa! What in the wild world of sports happened yesterday?!  Mortgage rates absolutely tumbled, which is obviously great news for the housing market.  We actually saw rates on 30 year fixed rate mortgages drop as low as 5.25%.
So what happened?
In a bold move, the Fed announced that it would be buying up to $500B in mortgage bonds backed by the “Mae� triplets, Fannie, Freddie and Ginnie.  Most of my sources think this was a smart move.  The net result should be an increase in the availability of credit for refinancing and the purchase of homes along with low—albeit still volatile—long-term rates for the foreseeable future.
This sort of decisive action on the part of the Fed is critically important.  Their action will support the housing markets and cultivate improved conditions in the financial markets.  We need credit to be available.  When the credit markets are too tight—e.g. the liquidity crunch we’ve witnessed—our economy suffers.
Likewise, by keeping LONG-TERM rates low, the Fed can provide more stability to the markets.  One of the few ways for the Fed to influence long-term rates is through actions like providing stability the mortgage-backed securities market.
Many people think there is a direct correlation between Fed rate cuts and mortgage interest rates, but this is not the case.  When the Fed cuts rates, it has a direct correlation to short-term rates only, such as the Prime Rate, CD rates, and banking indices.
Long term rates are tied to mortgage-backed securities, so when money flows into Mortgage-backed Securities, it means more liquidity, and lower long-term mortgage rates.  That’s why the Fed’s actions were so important.
If you have any doubt as to how lower rates translate to improvements in the housing market and more buying opportunities, consider this example:
Let’s presume a buyer put down 20% on a “typical” house in California that one year ago cost $500,000 when mortgage rates averaged 6.5%.  With a $400,000 mortgage at 6.5%, the mortgage payment would be $2528.
Now fast forward a year…
In this particular area, let’s say prices have come down 20%.  Now the home is worth $400,000.  With interest rates now at 5.5%, and a buyer puts 20% down for a mortgage of $320,000, their payment would be $1816, a savings of $712 dollars a month!  That opens the market to a lot more buyers.
Of course, not everyone has 20% down, so fortunately we still have FHA loans which only require 3% down.  On a $400,000 loan, the borrower only has to come up with $12,000 for the down-payment with interest rates comparable to conventional loans.  The only difference is that the borrower pays an up-front and monthly mortgage premium to insure the loan against default.
This is a great time to buy or refinance, especially over the holidays.  There are lots of buying opportunities out there!
Tags: fed bailout, fed buys mortgage bonds, interest rates, mortgage rates
November 26th, 2008 at 12:21 pm
“In this particular area, let’s say prices have come down 20%. Now the home is worth $400,000. With interest rates now at 5.5%, and a buyer puts 20% down for a mortgage of $320,000, their payment would be $1816, a savings of $712 dollars a month! That opens the market to a lot more buyers.”
Really? How many buyers do you know right now that have $80,000 in CASH for a down payment?
That’s the problem. All of the qualified buyers already have homes.
November 26th, 2008 at 12:30 pm
Fannie Mae still allows you to put down 10% and with FHA programs you can put down 3%, so you could come in with as little as a $12,000 down payment. With a seller concession for closing costs, that would $12,000 would be net dollars.
November 26th, 2008 at 12:36 pm
If you lower the down payment, you are raising the financing. So your monthly payment is still substantially over your original $1800/month estimate, which does not include property taxes ($330 per month) and insurance and maintainance, which moves your costs well north of $2200/month.
Last I checked, the only place you can buy for $400K is not in a particularly nice neighborhood and often requires “TLC” to bring it up to par, which will require an additional outlay of capital.
I currently rent a nice 2 bedroom apartment south of California Blvd for $1400/month, which includes my water bill. The only way I could possibly afford to live in this neighborhood would be paying over $600K for a condo. Even without a down payment, my monthly expenses would double. Why is this worth doing, when I can wait another few years and home prices will be lower?
November 26th, 2008 at 2:54 pm
That’s not true. I’ve been closing deals on condos in West L.A. in the low $400s recently. I’m not sure if you’re taking into consideration the tax benefit of owning a home, which lowers your true cost significantly. As far as waiting another few years because home prices are lower, is this a prudent strategy?
What if prices bottom out next year?
What if interest rates are 7.5%?
What if down payment requirements increase?
What if you can’t qualify for financing for an unforeseen reason?
There are a lot of “what if’s”. The point is there are so many variables, that “chasing a bottom” is usually not the most prudent strategy.
December 1st, 2008 at 2:12 pm
Are you not paying attention to the volatility of mortgage rates? How about the market conditions? The only buyers that will qualify for 5.5% are pretty bulletproof with documented income, high FICO, and 20-25% down. If you’re only putting down 10% or worse, an FHA 3%, you can pretty much kiss the lowest rate goodbye. Factor in PMI and the next to no odds of getting a 5.5% loan with no points, your effective rate is well above 5.5%.
Let’s not forget that Pasadena and West LA are majority Jumbo mortgage territory. This 5.5% won’t even touch that.
To back up Tim, please crunch his numbers for us with your “tax benefit of owning a home” argument. $1816 + property tax + insurance + maintenance + HOA. Now subtract the “tax benefit”. I have a fantastic 2 bedroom apartment in a safe neighborhood at $1200/month. We’ll use Tim’s higher number of $1400. Does the tax benefit cancel all this out? For these calculations, we’ll ignore the rapidly depreciating home prices and the nominal loss of 2.5% savings interest on your 20% down payment.
I would agree that “chasing a bottom” is not the best strategy, but realtors take that a bit too far. There’s a difference between timing the exact bottom and following the trends and making a guestimate within a reasonable range of the bottom. Based on the current carnage, we are nowhere near there.
And just so you know, your statement: “What if you can’t qualify for financing for an unforeseen reason?”, assuming you didn’t buy… this sounds like a good thing. You probably dodged a bullet.
December 1st, 2008 at 3:23 pm
A couple of things here…
Of course I’m taking into consideration the volatility of rates, which is my point exactly. If you can lock in at 5.5% or lower, that’s a stellar rate. Right now, my FHA rates for a borrower putting 3% down with a credit score as low as 620 on a $600,000 loan would qualify for a 5.5% based on today’s rates, and that’s with mortgage insurance that is half as much as a Fannie Mae conforming loan.
As far as a “dodging a bullet”, I’m referring to changes in lending guidelines, FHA requiring more of a downpayment, interest rates increasing, etc. If you got in with a low interest rate on a 30 year fixed, you’re in good shape, because you got a loan that you could afford.
Granted, if you’re paying $1200 in rent, and you like where you live, and you don’t think now is a good time to buy, I doubt you will ever feel it’s a good time to buy.
December 1st, 2008 at 3:43 pm
Based on what I’m reading here from Hannah and Tim, is that it sounds like you really have no desire to purchase a home. I don’t think the stars will ever be in alignment enough for you to buy….unless interest rates come down to 3.5%, banks require no downpayment, credit scores don’t matter and the median price of a home drops to $200,000 in Pasadena. Why don’t you be honest with yourself? You really don’t want to buy a home, now or ever?
December 1st, 2008 at 5:45 pm
Seems like I hit a nerve. To me, housing is a place to live, and if and when it is an investment, it’s at retirement and you no longer have housing payments (minus property taxes/maintenance) to deal with. I rent because I’m happy with where I’m living now, and because it’s a smart financial move. I have enough liquid cash to buy an average house outright, I make just under $200K/year, and I choose not to buy right now. That doesn’t mean I won’t ever buy.
So, be honest with yourself, the market’s a mess and now is probably not the best time to buy. The median price is too far out of line with median income, we’re in a recession, and California’s unemployment rate is over 8% and has only been getting worse. I don’t believe there are enough buyers who will qualify at 5.5% or who will want to buy at current prices to turn this around.
December 3rd, 2008 at 10:03 am
“it sounds like you really have no desire to purchase a home.”
I have owned two homes in the past. I just don’t see a reason to buy one at these prices. I’ve owned homes from 1975-1989, from 1994-2003, and my selling was due to job relocation. In both cases, the cost of owning a home vs. renting was worth owning a home. Today, it’s nowhere near that level.
My desire to own a home is determined when I can afford. David, if you honestly believe that the cost of owning a home will FOREVER be this much more expensive than renting, than yes, I will never own a home. But I believe you are mistaken. I believe that owning a home WILL get much less expensive over the next 5 years, and sometime before then, I will be owning my 3rd home. I can’t tell you exactly when that is in terms of MONTHS, but I can tell you it is when the cost of owning a home is less than 4X annual incomes for the area. And I have a strong belief that this will happen, because it has ALWAYS HAPPENED.
December 3rd, 2008 at 10:06 am
At the end of his article Jeremy Kossen concludes:
“This is a great time to buy or refinance, especially over the holidays. There are lots of buying opportunities out there!”
And THIS is what I believe is bad advice. This is NOT a great time to BUY a home. It might be a good time to refinance.
If you believe the history of homebuying has been the years 2003-2008, then yes, this is probably the best time in the last 5 years to be deciding to buy, just because the previous 5 were so horrible. However, the next 5 years are going to be SO MUCH BETTER you’d have to be a blind optimist to think otherwise.
December 4th, 2008 at 1:11 pm
The best time to buy will be when mortgages are 0% and FHA gives the buyer $10,000 to buy a
home. PLEASE… WHERE ARE THE MORON BUYERS that believe it is time to buy?.
Smart buyers know that this is NO time to buy because median salary/Home price ratio do not
add up. Home prices will go down and by a lot of $$$$’s yet…
This is not an interest rate problem is a good paying job problem, and too much debt.
What the feds are doing is trying to revive the housing bubble. It won’t work. Stupid people are
already priced out of the housing market and losing their homes to foreclosure or by choice.
And NO it is NOT a good time to buy a home. I want to see the Realtors buying these great deals themselves.