Washington Report: Federal Reserve

By far the biggest news for housing out of Washington last week had nothing to do with the Obama administration, nothing to do with Congress. Instead it was these very carefully chosen words from the Federal Reserve Board's open markets committee: We "will employ all available tools," the board said, to turn the economy around, and our number one focus will be the housing and mortgage markets.

In this case, the "all available tools" included the equivalent of a massive shot of adrenaline for home real estate: The Fed pledged to essentially flood the mortgage market with so much new capital that loan rates will drop to unprecedented levels - possibly into the mid four percent range for 30 year fixed rate mortgages. Maybe even lower.

How will that happen? The Fed intends to buy $750 billion in new mortgage-backed securities from Fannie Mae and Freddie Mac . That's on top of the $500 billion it previously committed to buy.

Those mortgage securities will then sit on the Fed's balance sheet, providing long-term returns to the central bank.

More importantly, by providing a guaranteed outlet for conventional mortgages, the Fed will encourage lenders across the country to extend loan commitments to home buyers and refinancers immediately.

It should also throw a lifeline to large numbers of current home owners who are on the brink of not being able to make their monthly mortgage payments, and who simply need lower interest rates through refinancings to afford to keep their houses.

Lower mortgage rates through the new program will almost certainly pull buyers off the sidelines this spring and summer, and even put a floor on home prices in the hardest-hit markets.

Everywhere else, rates in the mid-four percent range or lower could even put upward pressure on selling prices. That's because when you lower the monthly cost of borrowing to buy a house, you make it more affordable, even at a slightly higher price.

Is there any downside to all this stimulation of the housing sector? Probably the biggest worry over the long-term is that inexpensive capital may contribute to higher inflationary pressures in the coming years.

But the Fed seems to be saying: Hey, let's tackle one problem at a time. Right now we're trying to help housing out its anemic state. If that eventually spikes inflation's ugly head, we'll deal with that when it comes up.

Written by: Kenneth R. Harney / Realty Times

Thinking about Buying or Selling?
Call Alvin's Team Today! 800-666-4718
Or visit our website: www.LivingLakeTahoe.com