Federal Reserve Extends Bailout for Housing

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Federal Reserve policymakers announced yesterday that although the economy has improved, they are not yet ready to remove monetary support for growth. This was good news for both the economy and housing markets.

After its two-day meeting, the Federal Open Market Committee made two important decisions that affects the nation's housing sector—keeping the federal funds rate near zero and extending its agency and mortgage-backed security purchase program.

The central bank continued to proceed cautiously about the recovery, warning that the nation could experience further job losses into next year. To this end, the Fed left its target interest rate near zero and asserted that the rate will likely remain at "exceptionally low levels" for an extended period.

The Fed also issued a statement about unwinding its mortgage debt purchase program. The Fed has indirectly subsidized the housing sector this past year by purchasing a great deal of mortgage debt which bids up bond prices, while bringing down bond rates. Thirty-year mortgage rates have hovered around 5 percent for the past twelve months, providing low cost financing for home purchases. Market observers have anticipated that at some point, the Fed would begin winding down its bond purchase operations, likely sending mortgage rates northward. Higher mortgage rates promise to inhibit future home sales.

The Fed has already purchased more than half of the $1.45 trillion committed to these purchases. According to the Fed's statement, the central bank will commit to extend this program until March 2010. This means that the Fed will purchase about $24 billion of mortgage-related bonds every week until March of next year.

Most analysts applauded yesterday's news coming out of the Federal Reserve and expect the central bank to remain accommodative until late next year. Economy.com issued a statement on its web site endorsing the Fed's action.

"We believe the central bank is taking the correct approach, as both the economy and financial markets remain fragile. With inflation pressures dormant and the unemployment rate within striking distance of 10 percent, we don't expect the Fed to begin tightening monetary policy before late 2010. By holding rates extremely low and extending purchases of agency-and mortgage-backed securities into next year, the central bank is providing the necessary stimulus for the recovery to firm."

Participants in the nation's housing markets issued a collective sigh of relief immediately following the release of the Fed's statements. Although the housing sector has experienced modest gains in home sales and residential construction activity in recent months, a complete recovery remains extremely fragile. The $8,000 home purchase tax credit is scheduled to expire at the end of November which is expected to inhibit first-time home buying in the coming months. In addition, most analysts expect a new steady flow of foreclosure filings due to planned rate resets on option ARMs and interest only loans over the next several years. More foreclosures adds to the already excessive supply of homes, exerting downward pressure on home prices which drives some households to postpone home purchases until prices stabilize. And a successful housing recovery continues to be held hostage to a struggling economy that continues to shed jobs on a monthly basis.

The Fed's actions yesterday provide some comfort to a fragile housing sector that the central bank remains ready to support housing activity, at least until March of 2010.

From Real Estate Economy Watch