I have been writing about this for some time, and it is worth bringing to the surface again today. If you’re interested in my previous comments, feel free to review them at your convenience:
Who controls interest rates? – 01/11/10
Mortgage rates at record low – 12/05/09
Prepare for rising mortgage interest rates – 11/05/09
The reason this comes up again today is a current announcment from the Federal Reserve:
Fed May Take Chance Ending Debt Purchases Won’t Hurt Housing (Bloomberg, 01/27/10) – “The Federal Reserve may take a chance the housing market can stage a comeback without its support by announcing today it will stick to the plan to end a $1.25 trillion program of mortgage-debt purchases in March.”
By artificially supporting demand for mortgage-backed investments, yields — and therefore mortgage interest rates — have been held artificially low. The budget for those purchases is set to expire in March. If the Fed stops its purchases, then one of two things are likely to happen: (1) investors will require yields that more realistically reflect the risk of the underlying mortgage debt, or (2) if investors move a meaningful share of their funds into other investment alternatives then the total amount of money available for new mortgage loans will be reduced. Either of these (or, more likely, a combination of the two) would exert upward pressure on mortgage interest rates.
In the short-run, the availability of tax incentives for home purchases may counteract the effect of increasing rates. If “natural” demand for homes increases enough during the summer months, then higher rates may not be too disruptive. At some point, however, the market will find equilibrium — almost certainly at higher interest rates than we have now. In addition, the Austin-Central Texas real estate market remains strong and is among the first to emerge from the recession. Normal market trends will likely push home prices higher in coming months. (January Market Update — Austin and Central Texas)
So …. NOW, we have tax incentives and very low interest rates and seasonally low home prices. LATER, tax incentives will expire (contracts after April 30) and interest rates and home prices are likely to increase.
If a home purchase is in your future and you can qualify, NOW is the time to act.