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September 14, 2012

Fed action will cause mortgage rates to fall even lower

by Jason Grote
Empty Store

[Editor's note: We asked Jason Grote  (Central Coast Lending owner and Mortgage Matters host) how the latest Fed action would move interest rates. His reaction (generally speaking): the program should create an environment with a strong downward pressure on mortgage rates, although its the open-ended clause complicates our ability to make longer-term projections].

Last week we saw a pretty dismal employment report. Payrolls added just 96,000 jobs in August, and although the unemployment rate dropped from 8.3% to 8.1%, the decline came because more people dropped out of the work force. In fact, our jobs market has the lowest participation since 1981. For a few month now we hear that real estate is doing its part to pull the us economy out of its deep slumber, but until we see the jobs market return to normalcy we are still treading water.

Yesterday, the Federal Open Market Committee (FOMC) announced an open-ended quantitative easing program (QE3) designed to immediately lower interest rates, help the real estate market, and ultimately help the employment situation. The unique twist to this plan is the open ended nature. In previous bond-buying programs, the Fed announced a cap or maximum allowance for the purchase of bonds, which allowed traders and money managers to track the funds and name the end date. With this knowledge, we could estimate rates and yields, and have an idea of when they would increase (as the plan expired). This new plan is open ended, which means we have no idea how long it will last.  The Fed will be buying these bonds until they no longer feel it’s necessary, which could mean until unemployment dips below 7.5 percent.

This is good news for the housing market and particularly the interest rate market. A guaranteed demand source such as the US Federal Reserve will help keep yields low and consequently rates as well. This move puts immediate downward pressure on rates and today we see the payoff.

Now, let’s keep a close eye on inflation. By pumping money into an economy, the Fed risks creating inflation. So the elephant in the room is: will an open ended spending of $40 billion per month with no preconceived limit send us into a rapid inflation cycle?

 

Part 1: Fed Announces $40 per month bond buying program to aid economy

Part 2: Reactions to Fed stimulus mixed

Part 3: Fed program should push mortgage rates lower 

 

Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. To see why using a broker offers lower rates and superior service, click HERE. For a free, hassle-free online pre-qualification click HERE or call 805.543.LOAN to talk to one of our expert loan officers.

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