The Federal Reserve has now completed the third and final round of quantitative easing, or QE, ending its longstanding policy of buying bonds to artificially push rates down. The government’s bond-buying binge was aimed at lifting the economy out of the worst recession in years.
With the Fed now absent from the bond-buying arena, one would think that rates would be a lot higher because now only market forces are dictating where interest rates are. With mortgage rates still in the low 4s for a 30-ear fixed and in the mid 3s for a 15-year, the market is telling us that our recovery is still very fragile. Europe and China and both experiencing slower growth and there the dreaded “D” — deflation — is emerging as a worry among economists.
The National Association of Realtors recently predicted mortgage rates in the 5s in 2015 and in the 6s in 2016. That would indicate that they are seeing a very robust real estate market. But Fannie Mae and Freddie Mac are looking to lower their down payment requirement on conventional loans to 3 percent from 5 percent, setting the stage for a 40 percent reduction in the minimum down payment. I believe that Fannie and Freddie are worried that the current guidelines will not be enough to sustain a healthy growth rate in real estate purchases.
The real estate market will have to be going like gangbusters for rates to reach the levels that the NAR is estimating. If rates stay at the current levels, I believe that the market is telling us that we are still not out of the woods and that we should all remain cautious.
2015 will be an interesting year to say the least. Hopefully we will not have to put the training wheels back on the bike.