With Fed boosting economy, now may be the time to refinance

With the Federal Reserve buying billions of dollars worth of mortgage-backed securities, you might think that mortgage rates are poised to fall even lower than the current rock-bottom levels. Maybe you should wait on that refinancing, you wonder, or delay purchasing a house until the market is even more favorable.

Not so fast. The Fed’s purchase program certainly is expected to keep rates low for some time, but there’s no reason to think rates will fall much further, according to economists. In fact, looking at the past two Fed bond-buying programs, the market felt a stronger impact in the weeks immediately following the announcement — less so as time went by.

That’s not to say that the Fed’s actions are immaterial to current and potential homeowners. Three key factors that affect housing values and mortgage rates include why the Fed decided to act, current real estate market conditions and what the future could hold, both for the level of rates and the capacity of the financial system to handle demand for mortgage applications.

“The Fed wanted to give as much juice as possible to a piece of the economy that was starting to show some life,” said Liz Ann Sonders, chief investment strategist for San Francisco-based Charles Schwab & Co. “What is more important is the turn we’ve seen in prices.”

A nudge for housing investment

On Sept. 13, Fed Chairman Ben S. Bernanke announced that each month the Fed would buy as much as $40 billion of mortgage bonds to support the market and boost the economy, as well as $45 billion of Treasury securities. The central bank also promised to keep interest rates low through mid-2015, regardless of signs of economic recovery. That caused mortgage rates to fall to historic low levels.

“The Fed is saying, ‘We stand ready to do what we have to do to keep long-term rates down,’ ” said Bob Walters, chief economist at Quicken Loans in Detroit.

Investors face a long stretch ahead of low returns from such traditional financial instruments as bank deposits and bonds. The Fed’s hope is that they’ll be pushed into buying real estate and that this will further lift home prices, said Joseph Kalish, chief global macro strategist for Ned Davis Research, based in Venice, Fla.

“You’re really coercing investors who are holding cash to get into something else,” Kalish said. “What Bernanke is hoping for is that some of that money ends up in real estate. . . . People are fed up with earning zero percent at the bank. They’re buying up these foreclosed properties.”

About 11 million U.S. homeowners owe more on their mortgages than the home is worth, known as being “underwater.” For every 5 percent increase in home prices, another 2 million properties rise “above water.” So policymakers can be most effective in helping homeowners if they’re able to encourage prices to climb, Kalish said.

The CoreLogic Home Price Index is up 2.5 percent from a year ago and the Federal Housing Finance Agency’s purchase-only index reached its highest level in nearly two years, after growing 3.7 percent from last year — the fastest pace since September 2006, according to Kalish.