Futures Outlook - An Excerpt from CRB'S Futures Market Service
Fed/Treasury finds a double-barreled method of supporting the economy through lower mortgage rates
The Fed and the Treasury have found a double-barreled method of supporting the economy by forcing mortgage rates lower. First, this helps stimulate consumer spending by allowing many homeowners to refinance and cut their mortgage payments, thus giving them more disposable income at the end of each month. Second, lower mortgage rates make home purchases more affordable, thus boosting home buying and reducing the downward pressure on home prices.
The Fed and the Treasury initially focused their bailout efforts on the banking system and the corporate finance markets in an attempt to halt the systemic run on the global financial system. Now that the banking system has been stabilized for the most part, the Fed/Treasury have turned their attention to supporting consumers since consumer spending accounts for two-thirds of the US economy. The Fed is trying to get the securitization market revived for consumer and small-business loans via buying securities in those markets. However, the Fed is making an even bigger play in the mortgage markets where it recently announced a program to buy $600 billion of mortgage securities and $200 billion worth of Fannie/Freddie debt (thus reducing Fannie/Freddie financing costs).
The response has been a sharp 1 percentage point drop in the U.S. mortgage rates in the past 5 weeks. The 30-year mortgage rate in the latest reporting week (Dec 4) averaged 5.53%, according to Freddie Mac, which is an 11-month low and just 5 bp above the 4-3/4 year low of 5.48% posted in January 2008. The record low for the series (which has history back to 1972) is 5.21% in June 2003, which means the 30-year mortgage rate is currently only 32 bp above the record low.
The new Fed/Treasury goal of pushing mortgage rates lower gets to the heart of the problem, i.e., falling home prices and falling mortgage securities prices (which cause bank losses). There can be no assurance that the current economic crisis is over until home prices stop falling. The new Fed/Treasury strategy of pushing mortgage rates lower is likely to result in the lowest mortgage rates seen in decades, thus stimulating both consumer spending and the housing market.
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