In January of 2014, everyone was interested in what the Federal Reserve System was going to announce in regard to mortgage interest rates. The Fed meets eight times a year and the Federal Open Market Committee (FOMC) follows with a public statement. The big topic was where mortgage interest rates were headed following the Fed’s analysis. Arizona Mortgage Lenders are interested in anything relative to the direction of mortgage rates. The committee analyzes what the Fed says about overall economic progress and our nation’s employment situation. Lenders were also stalking the Fed’s actions to see what their plan was to taper out of Quantitative Easing (QE). QE is the program that had kept mortgage rates so low for so long.
What exactly is Quantitative Easing?
Quantitative Easing is a monetary policy where a central bank buys set amounts of government bonds or other financial assets to help stimulate economic growth. It’s not a typical form of monetary policy. Used mainly when standard monetary policy has become ineffective at fighting low inflation or deflation.
The Fed’s Thoughts
1. Economic growth has picked up in recent quarters
2. Employment market results overall have shown improvement (unemployment rate dropped yet remains higher than the Fed would like to see)
As a result, the Fed feels very confident in the economy’s recovery and would continue to taper QE. This would reduce the number of assets they are purchasing (mortgage bonds and treasuries). This was a good thing! It meant that our economy was healing just like Fed had hoped. The vote to continue easing asset purchases was unanimous (typically there’s at least one in the Fed’s bunch that dissents). The purchasing of assets (mortgage bond and treasuries) is what had pushed mortgage rates down over the past several years. The House Team always watches the bond market closely and was paying extra attention during this time. The typical reaction to adjusting out of the use of Quantitative Easing is to see mortgage interest rates tick up a bit.
Where Mortgage Rates Stand Today
What happened, however, is the opposite of what many expected. Since the FED actually started to taper their purchases, Arizona mortgage rates hung in and actually improved. There are some international factors that played into this rate drop as well. One is what we call a “flight to quality” (meaning investors were simply choosing bonds over stocks and mortgage bonds). Mortgage rates are the benefactor in this case. Overall and long-term the expectation is still for mortgage rates to climb relative to where we have been the past few years. Why? Because the FED will no long act as training wheels for the mortgage rate market.
As a result, now is a great time for home-buyers to take advantage continued improvement in mortgage rates. Rates are still better today than they have been in 28 out of the past 30 years!
By Jeremy House