So what happened?

In a bold move, the Fed announced that it would be buying up to $500B in mortgage bonds backed by the “Mae� triplets, Fannie, Freddie and Ginnie.   Most of my sources think this was a smart move.   The net result should be an increase in the availability of credit for refinancing and the purchase of homes along with low—albeit still volatile—long-term rates for the foreseeable future.

This sort of decisive action on the part of the Fed is critically important.   Their action will support the housing markets and cultivate improved conditions in the financial markets.   We need credit to be available.   When the credit markets are too tight—e.g. the liquidity crunch we’ve witnessed—our economy suffers.

Likewise, by keeping LONG-TERM rates low, the Fed can provide more stability to the markets.   One of the few ways for the Fed to influence long-term rates is through actions like providing stability the mortgage-backed securities market.

Many people think there is a direct correlation between Fed rate cuts and mortgage interest rates, but this is not the case.   When the Fed cuts rates, it has a direct correlation to short-term rates only, such as the Prime Rate, CD rates, and banking indices.

Long term rates are tied to mortgage-backed securities, so when money flows into Mortgage-backed Securities, it means more liquidity, and lower long-term mortgage rates.   That’s why the Fed’s actions were so important.
If you have any doubt as to how lower rates translate to improvements in the housing market and more buying opportunities, consider this example:

Let’s presume a buyer put down 20% on a “typical” house in California that one year ago cost $500,000 when mortgage rates averaged 6.5%.   With a $400,000 mortgage at 6.5%, the mortgage payment would be $2528.

Now fast forward a year…

In this particular area, let’s say prices have come down 20%.   Now the home is worth $400,000.   With interest rates now at 5.5%, and a buyer puts 20% down for a mortgage of $320,000, their payment would be $1816, a savings of $712 dollars a month!   That opens the market to a lot more buyers.

Of course, not everyone has 20% down, so fortunately we still have FHA loans which only require 3% down.   On a $400,000 loan, the borrower only has to come up with $12,000 for the down-payment with interest rates comparable to conventional loans.   The only difference is that the borrower pays an up-front and monthly mortgage premium to insure the loan against default.

This is a great time to buy or refinance, especially over the holidays.   There are lots of buying opportunities out there!