Reports indicate the Federal Reserve’s newest round of quantitative easing is working as planned. Freddie Mac’s weekly Primary Mortgage Market Survey indicates average fixed mortgage rates have fallen to record lows for the second consecutive week. Fed-purchased mortgage securities have pushed 15-year fixed-rate mortgages to just .69 percent—their lowest in three years— and decreased 30-year fixed-rate mortgages to 3.36 percent—six-tenths of a percent lower than one year ago.
“Fixed mortgage rates fell again this week to all-time record lows due to the mortgage securities purchases by the Federal Reserve and indicators of a weakening economy,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The final estimate of growth in gross domestic product was revised down to 1.3 percent in the second quarter, representing the slowest growth in a year. In addition, personal incomes rose only 0.1 percent in August, while July’s increase was revised downward. And finally, pending home sales in August fell 2.6 percent, well below the market consensus forecast of a slight increase.”
Rates have fallen each week since the Fed announced Sept. 13 its plans to purchase $40 billion in mortgage-backed securities each month until the unemployment rate not only drops, but gains traction. Since the announcement, the 30-year fixed-rate mortgage has fallen nearly two-tenths of a point.
According to minutes of the Fed’s Dec. 13 meeting released today, the newest stimulus was aimed at aiding the housing industry in order to boost the overall economy. Most members felt the Fed’s purchase of bonds would decrease long-term interest rates, which would promote borrowing and spending, thereby stimulating the economy.
Fed members first, however, compared the possible outcome of buying Treasury bonds and MBS.
“Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement of late,” according to the meeting minutes. “One participant, however, objected that purchases of MBS, when compared to purchases of longer-term Treasury securities, would likely result in higher interest rates for many borrowers in other sectors.”
By short-term results, the Fed was correct in its assumptions. Home prices have already rebounded to their level nine years ago. New home sale prices, home construction and sales of existing homes have all increased.
CNN surveyed 14 economists, and nine stated a belief that home prices have either already increased or will before the end of the year. Just three months ago, half of those surveyed by CNN thought it would be 2013 or later before prices would rally.
“We’re seeing the signs of a pulse in a sector that has been flat-lined for a number of years,” Sean Snaith, economics professor at the University of Central Florida, told CNN.
More homeowners are refinancing, as well. According to the Mortgage Bankers Association, mortgage applications—of which 83 percent related to refinance—jumped 16.6 percent last week. The Refinance Index increased 20 percent from the previous week—its highest point since April 2009.
“Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in MBA’s survey dropped to new record lows in the survey,” said Mike Fratantoni, MBA’s vice president of research and economics. “Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates. Although there was a slight decline in the (home affordable refinance program) share of refinance activity, the level of HARP volume remains steady.”
Increased refinancing often boosts the economy. With lower interest rates, homeowners typically enjoy lower monthly mortgage payments and more spending money. As consumer spending—which accounts for 70 percent of the economy—increases, the whole economy flourishes.
Fed Chairman Ben Bernanke has now turned his focus toward the stock market. In an Indianapolis speech Oct. 1 he said higher stock would also be needed to drive consumer and business spending.
“It is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases,” Bernanke said in his Aug. 31 speech from Jackson Hole, Wyo. “This effect is potentially important because stock values affect both consumption and investment decisions.”
In a Sept. 27 report, Deutsche Bank economists forecast the Fed’s MBS purchases will lift stocks by 3 percent in the next two years, and increase home prices by 2 percent during the same period.
“It’s pretty clear that the stock market is the most important transmission mechanism of monetary policy right now,” Peter Hooper, chief economist at Deutsche Bank AG in New York, told Bloomberg. “That’s where you’re getting most of the action in terms of lift to the economy. It’s the stock market that’s going to have to be carrying the load.”
Hooper, who was a Fed economist for 26 years, noted gains in stock and real estate could boost the economy by a half percent in by 2014, adding as many as 500,000 jobs—which would decrease the unemployment rate by about .3 percent.
