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August 13, 2012

Low Mortgage Rates Through 2014?

Syndicated — When shopping for real estate, there are two components that determine how much you can afford: the price of the home and the interest rate you are able to secure. Based on comments from the Federal Reserve at the close of the Federal Reserve Open Market Committee meeting this month, housing may be "extremely affordable" for at least the next year or so.

Federal Reserve Open Market Committee comments

The Federal Reserve Open Market Committee (FOMC) meets eight times a year to discuss economic and financial conditions, determine the appropriate stance on monetary policy and assess the risks to its long-run goals of price stability and sustainable economic growth. At the conclusion of each meeting, the panel issues a statement with commentary about its discussions and decisions, and as a result, most headlines will read something like "Fed lowers interest rates!"

Last week, the Fed made some interesting comments in its press release including:

  • The Federal Funds Rate would remain unchanged at zero to 0.25 percent.
  • Despite signs of improvement, the housing market remains depressed.
  • It will continue "Operation Twist," a program where it sells bonds with a duration of three years or less and uses the proceeds to purchase longer-term bonds with durations of six years or more, which helps lower long-term interest rates while keeping inflationary pressures at bay.
  • Market conditions are likely to warrant exceptionally low levels for the Federal Funds Rate at least through late 2014.

Federal Funds Rate vs. the mortgage rate

When the Fed decides to lower interest rates, it lowers the Federal Funds Rate - the rate at which banks can borrow money from the Fed. Note: This rate is not the mortgage rate that you see. In fact, there is actually little correlation (other than a general one) between a lower Federal Funds Rate and a lower mortgage rate because mortgage rates are set by the buying and selling of mortgage-backed securities on Wall Street.

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