CAN RATES GO DOWN ANYMORE?

Another informative post my friends at KCM….

Can Rates Go Down Any More?

by DEAN HARTMAN on OCTOBER 21, 2010 ·

I agree with Dean that rates will go down for a time, maybe six months, but the reason is to get American products to look cheaper.  Congress is through helping the housing market, and in some ways I believe it should not be artificially propped up.  Eventually rates will rise because a sustained period of a weak dollar will not help the overall economy.

It appears they CAN and that they WILL. The buzzwords today are Quantitative Easing. It is another of the weapons the Fed has at its disposal to impact the economy, as a whole, and interest rates in particular.

Let me explain. In so far as the Fed has already lowered the rates they charge to lending institutions as much as they can, and they still see a sluggish economy with weak employment numbers and growth, the Fed appears ready to enter a second round of Quantitative Easing (QE). QE is when the Fed begins to buy Mortgage Backed Securities in earnest. They do that by paying more than the market price for MBSs; therefore, pushing interest rates lower.

But why do it? I mean rates are historically low already. Is lowering rates another quarter or half percent going to get someone to buy a house that hasn’t already gotten off the fence? Maybe, but I can’t see the number of people deciding to buy at 4% rates being that significant as compared to those looking to buy at 4.5%. There HAS to be other reasons. Maybe….

  1. The Fed realizes that lower rates will stabilize home prices. Lower rates mean borrowers can borrow more money based on their income, enabling them to pay more for a home which can slow the decline of prices, stabilize prices, and in a few areas even raise prices of homes.
  2. The Fed needs to look like they are doing SOMETHING to energize the economy or get consumer confidence turned around.
  3. The Fed has an agenda other than lower mortgage rates. Maybe the Fed is using the lowering of rates, in an effort to devalue the US Dollar abroad. By lowering the value of the dollar, our products become a better bargain to buyers overseas. So, maybe, just maybe, this is actually an attempt to kick start the economy. If we sell more products overseas, we need to produce more products, hire more employees to make, sell, and distribute those products. Can I smell job growth through QE?

Understand that a weakened dollar will eventually force rates to move up (to re- strengthen the dollar); so, there is going to be a window of even more incredible mortgage rates, but, the window will need to be carefully watched because it can’t be left open forever.

There is no history we can point to predict if QE can or will work. Nor is there any real indication of the level of aggressiveness the Fed will take in this area. (Listen to the rhetoric between now and next week’s release of the Fed’s Beige Book as hints.) It may just be another shot in the dark, but personally, I am in favor of ideas that promote job growth more than government hand outs and bail outs.

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