The Fed has announced plans to halt the purchase of Mortgage Backed Securities (MBS) starting at the end of March. They will then monitor the economic impact and reserve the right to enter back in if market conditions warrant it.
MBS are bonds issued for the purchase of mortgage notes and the purchase of the MBS by the Fed has helped to keep interest rates low. If the sale of MBS drops, rates will eventually rise. The goverment is counting on private investors to enter back into this market and pick up the slack.
The first time home buyer tax credit is due to expire in April. The tax credit helped fuel the housing market so this will have a negative affect as well. There is some talk of a possible extension again but nothing firm has been decided.
Most analysts expect there to be a rise in interest rates at least for the short term, as much as 1% or even more, resulting in a negative impact on an already shaky economy. The housing market is one of the major driving forces of the economy and if rates rise this could very well cause home prices to drop as less potential buyers will be able to qualify or afford the higher mortgage payment.
The feeling is, if this scenario were to play out the Fed would have no choice but to step back into buying MBS. But how much damage will have already been created and how long will it take for the economy to regain any lost ground?
In my opinion, until the job market picks up and unemployment drops significantly this economy will be on life support and the Fed would be wise to stay in the MBS market until that occurs.
Fasten your seat belts, we could be in a for a bumpy ride.
Thursday, January 28, 2010
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