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St Louis Real Estate Search

Feds pulling support of mortgage market- will interest rates increase?

Dennis Norman

The Federal Reserve announced it will stop purchasing mortgage-backed securities by the end of March.

In November, 2008, the Federal Reserve announced, in an effort to help the housing market, it would purchase mortgage-backed securities. Then, in March, 2009, the Fed increased the total amount of money they would invest in such securities to $1.25 trillion and estimated that they would complete those purchases by the end of first quarter 2010.

The Fed’s action I think certainly added some liquidity and confidence to the ailing housing market and now, that the time has come for them to pull out of the market, the question is what effect it will have on interest rates is uncertain. Some industry analysts are cautioning that after the Fed pullout the private investor sector will want a higher return thereby forcing mortgage interest rates upward.

Last week the Federal Reserve announced that they will complete the purchases of mortgage-backed securities by the end of this month, thereby taking the Fed out of the market. In their announcement they said “economic activity has continued to strengthen and that the labor market is stabilizing” but cautioned that the pace of economic recovery “is likely to be moderate for a time.”

By this time next month we will get an idea of what effect the Fed’s action will have on interest rates. I think it is safe to say we are going to see an increase in mortgage interest rates although I would predict that the increase will be slight, at least initially. The interest rate for a 30-year fixed-rate mortgage has been hovering around 5 percent for a while now, sometimes bouncing above or below that mark. My guess is we will see this rate hover more in the 5.25 – 5.50 percent range soon.

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