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Federal Reserve’s quantitative easing announcement sets markets swirling

The three major U.S. stock indexes (Dow, Nasdaq, S&P 500) set five-year highs (12-year for Nasdaq) after the U.S. Federal Reserve announced its latest round of monetary stimulus. Mortgage rates fell slightly after the announcement, but have mostly remained steady. Over the long run, the quantitative easing strategy (QE3) should keep rates low if not push them lower, but for now the 10-year Treasury yield has grown to 1.85 percent (from 1.59 percent at the beginning of the month) as equity rallies have moved investors out of Treasury bonds and into stocks.

So what is this announcement all about?

The Fed will purchase about $40 billion in mortgage-backed securities per month until the economy shows adequate improvements. In total, by continuing other monetary policies (such as operation twist) the Fed will increase its long-term holdings by $85 billion per month. Through the twists and turns of monetary chemistry, the Fed hopes to keep interest rates low, stabilize the mortgage market, support real estate market, and ultimately bring down the pesky unemployment rate. The relatively unprecedented part of this plan is the “open-ended” clause, which says that they will continue the policy for as long as they see fit.

We have covered the event in three parts:

Part 1: Overview of the plan

Part 2: Response by economists & politicians

Part 3: How this action will affect interest rates

Stocks have now rallied on action from both the U.S. Federal Reserve and the European Central Bank, which has prompted analysts to question if the market rally has an underlying strength to it.

Switching gears now, CoreLogic has reported that there are 1.3 million fewer underwater homeowners thanks to rising home prices across the nation. Down from a peak of 12.1 million loans, there are now 10.8 million mortgage holders who owe more than there home is worth.

Lastly, we have seen two significant pieces of data that suggests now is the right time to buy a home. For one, a recent study by Trulia in the nation’s 100 largest metropolitan areas suggests that it is 45 percent cheaper to purchase a home rather than rent one – if the occupant will remain in the same home for at least seven years. Rent costs have outstripped the rise in home prices, and the low interest rate environment has significantly lowered closing cost scenarios and monthly payments.

ClearCapital gives us the other piece of good news in its Home Price Index – even as distressed property (REO) saturation in the market has decreased, home prices continue to improve, as demand for single-occupant “fair market” priced homes are on the rise. In other words, the market is being driven by average consumers instead of investors looking for a deal on a foreclosure home. You can read more on our report HERE.

Rates to begin the week are 3.250 percent (3.301 percent APR) for the 30-year fixed and 2.750 percent (2.738 percent) for the 15-year fixed. For more, go HERE. For how we calculate our rates, please see THIS post.

Please feel free to visit us on our website: We update mortgage rates every morning, and we cover mortgage, real estate, finance and economic news daily.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile