Important numbers have been released from the Federal Reserve-first, the lending rate between banks will be held at 0 percent to 0.25 percent.  Second, the Federal Reserve announced they would going to put even more money into our sluggish economy.

The Federal Reserve will purchase an additional $600 billion in long-term Treasury bonds over the next eight months, and it will also reinvest up to $300 billion in Treasury bonds, using proceeds from earlier investments. The purpose is to increase the money supply, and thus stave off deflation; and to keep interest rats low and increase the amount of loanable funds.

So what does this mean to us? The Fed is counting on more lending at lower interest rates. However, we wouldn’t necessarily count on it. As we’ve noted in past editions, increasing the money supply is inflationary. To date, most of the inflation has been in financial investments, namely stocks and commodities. In short, lower mortgage rates are not a given. Nor is it a given that lending volume will increase.

On the one hand, the Fed is encouraging homeowners to refinance; on the other hand, the Federal Housing Finance Agency – which oversees Fannie Mae and Freddie Mac – is making it difficult to refinance. Talk about a catch-22.

A survey from the structured finance technology firm Principia Partners found that three out of five asset-backed and mortgage-backed securities investors plan to increase their activity in the securitization space over the next 12 months. That means more diversity in the mortgage market, which should increase mortgage offerings, and, just as important, increase offerings that are conflated with less stringent, more market-oriented underwriting standards. 

In the meantime, mortgage rates continue to hold historical lows, but we think the risk that they won’t continue to hold these lows is increasing. Yes, more money can mean cheaper money, but it can also mean more expensive money if inflation takes hold in a serious way. At the least, we think interest-rate volatility will increase, making the waiting game more perilous. We see little upside in delaying refinancing or purchasing a home; there are simply too many unknowns lurking about that could spoil even the best-laid plans. The Census Bureau reported last week that the percentage of households that owned their homes has fallen to an 11-year low, at 66.9 percent. Homeownership had peaked at 69 percent in 2004. The historical norm, dating back to 1970, is around 65 percent. The drop in homeownership is actually good news, in that we are taking yet another step toward a more normalized market. With new home construction at a multi-year low, we could be forming a sturdy base from which growth can arise over the next decade.

Mortgage Update from Eric May at Prosperity Mortgage