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FED Comments Stabilize Rates

FEDOrange County, CA – Remember when the Federal Reserve’s soft-spoken comment that it may consider slowly tapering off it’s ongoing purchase of bonds over the coming year or so drove mortgage rates into the biggest spike we’d seen in years? Their most recent  comment has caused the rate rise to momentarily stabilize. What did the Fed say that made the ever-so-jumpy market calm down for a while? This from their statement made on Wednesday, July 31st, 2013:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

This is not a terrible surprise, given the mortgage-rate spike that occurred when they threatened to take even a small portion of their monthly $40 billion in treasury-backed securities purchase off the table. According to the same statement, “Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth.”

They did a very good job of calming the market back down by assuring us all that QE3 wasn’t ending anytime soon. To be specific, they now plan to continue their purchases until the job market looks much more solid: “The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

Does that mean that mortgage rates will fall back down? Not terribly likely. Mortgage rates naturally want to rise with a strengthening economy. It’s the law of supply and demand in action. When the demand for money is greater than the supply, rates will rise. That explains why rates got so utterly low when the economy collapsed. With the economy on it’s way back up individuals and companies will have the economic means and desire to borrow again. And with money being so cheap to borrow, many will seek to finance their purchases. Don’t expect a fast, massive climb. More likely they’ll creep up slowly over time. But shy of another massive economic disaster, they’re only going up from here.

That means the best advice is still ‘lock in your rates’, folks. every day you wait is another chance for rates to climb. And with most of the economic reports poitning towards growth we expect this trend to continue.

Want to hedge your bet? Ask me about our  unique Float Down Program. We lock your rate to protect against upside movement. But if rates drop we can lower you to the market rate.

Scott Storace

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