Mortgage rates are currently at a 40 year low. The low mortgage interest rates are the result of a combined effort of the Federal Reserve and Treasury Department. On November 25, 2008 the treasury department announced they were buying $500 billion of mortgage backed securities and agency debt as a separate action beyond the Troubled Asset Relief Program (TARP) funding. They wanted to create the perception that mortgage backed securities are liquid and safe. The plan had a dramatic effect as mortgage interest rates dropped by over one percent in a two-week period and created a refinance boom that is expected to continue for most of this year. The thought is that low rates will drive consumer spending and increase bank lending.
The intent of low interest rates is to drive buyers into the market by creating a more affordable mortgage. These historically low mortgage rates will save consumers hundreds or even thousands of dollars a year. This will create a waterfall effect in that the low rates will drive both new and buy-up consumers into the housing market. This will assist in creating home sale activity and allow home values to stabilize.
This plan also considered how consumer confidence can play a role in turning around the housing market and overall economy. Consumer confidence is arguably one of the best indicators of future consumer spending. These low rates will free up cash flow for consumer spending that will provide businesses reason to expand.
These measures have been part of a well thought out plan and could prove to be one of the reasons the economic recovery will take place.
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