Fed Stimulus to Aid Housing Market with Cheaper Mortgage Rates

The Federal Reserve has proposed to purchase agency mortgage-backed securities at a pace of $40 billion per month in an effort to push economic recovery.

This means home mortgages could get cheaper as the average rate on 30-year fixed rate mortgages will be reduced from 3.5 percent to about 3.25 percent and that of 15-year loans from 2.85 percent to 2.75 percent Stuart Hoffman, chief economist with PNC Financial Services Group told the San Francisco Chronicle.

The Fed hopes that the program would boost house sales and initiate refinancing activities.

However, experts believe that this move could have a modest effect on sales, though not bring in a huge turnaround.

“After all, most borrowers in a position to refinance have probably already done so. And it's not obvious why a would-be buyer who wasn't tempted by a 3.7 percent mortgage rate would be by, let's say, a 3.25 percent rate," Paul Diggle, a property economist at Capital Economics, told the Statesman.

Jed Kolko, chief economist at Trulia told the Statesman that though the Fed program does not directly address the most vital issues faced by buyers - saving enough for a down payment and qualifying for mortgage due to tight credit – by making borrowing cheaper, it could aid housing recovery.

 Announcing the program, the Federal Open Market Committee said that it “seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

And to aid the progress toward maximum employment and price stability, the Committee will reduce interest rates to near-zero levels at least through mid-2015, a Federal Reserve System press release stated, adding that they do not see unemployment rates come down anytime soon.

“The employment situation remains a grave concern,” Fed chairman Ben Bernanke told reporters. “While the economy appears to be on a path of moderate recovery, it isn’t growing fast enough to make significant progress in reducing the unemployment rate. Fewer than half of the 8 million jobs lost in the recession have been restored. And at 8.1 percent the unemployment rate is nearly unchanged since the beginning of the year and its well below its normal levels”