Last November, people with good credit could get a 3-year mortgage for 3.3%. Today, it’s 3.8%. The rate is likely to keep rising. Some estimates predict that it will be 5% at the end of 2014.
Every month, the Federal Reserve buys $40 billion worth of mortgage bonds from Fannie Mae and Freddy Mac, the nationalized mortgage agencies. That’s half a trillion newly counterfeited dollars a year. The FED has been doing this since late December. This is the so-called QE3 program.
What’s that? You mean that rates started moving up when the FED started subsidizing mortgages? That’s correct. But, you ask, wasn’t the QE3 policy supposed to keep long-term rates low? That’s what the FED’s experts thought. You mean the mortgage subsidy has produced the opposite effect from what the Federal Reserve’s economists said would happen? In a word, yes.
Housing affordability — home prices in relation to income — is dependent on low mortgage rates. That’s because Americans’ incomes are not rising. The economic recovery remains anemic. The unemployment rate is stubbornly high. So, with incomes stagnant, the only way to keep the housing market rising is with this subsidy from the Federal Reserve. But this subsidy is not keeping rates low. It is having the opposite effect.
The recovery in housing in Los Angeles, Boston, and New York City will reverse if this continues, real estate experts predict.